Issue 19 | www.dlapiperrealworld.com
Real Estate Gazette FOCUS ON: REAL ESTATE FUNDS AND INVESTMENT VEHICLES international KEY ISSUES FOR REAL ESTATE IN THE IMPLEMENTATION OF THE AIFMD ACROSS Europe
ASIA UNDERSTANDING FOUR KEY CHANGES TO THE HONG KONG REIT CODE
MIDDLE EAST EXPLORING FOREIGN INDIRECT INVESTMENT IN DUBAI’S REAL ESTATE MARKET
NORWAY INTRODUCING FOREIGN REAL ESTATE AIFS IN NORWAY
SPAIN SPANISH REITS TAKE OFF
US IRS CLARIFIES REIT DEFINITION OF “REAL PROPERTY” IN PROPOSED REGULATIONS
AUSTRALIA CHANGES TO FIRB APPROVAL OF FOREIGN INVESTMENT IN AUSTRALIAN REAL ESTATE
ITALY LENDING BY INSURERS: NEW ITALIAN LEGISLATION SWEDEN Providing a AVOIDING STAMP DUTY BY MEANS snapshot of the OF CADASTRAL MEASURES efforts of national UK RIGHTS TO LIGHT—A NEW DAWN governments to APPROACHING? implement THE AIFMD Issue 19 CONTRIBUTORS Catherine Pogorzelski – Luxembourg +352 26 29 04 20 53 [email protected]
ISSUE 19 | www.dlapiperrealworld.com Hendrik Bennebroek Gravenhorst – Amsterdam +31 (0)20 5419 973 [email protected] Luke Gannon – Hong Kong +852 2103 0824 [email protected] REAL ESTATE Christopher Knight – Hong Kong +852 2103 0808 [email protected] Koen Vanderheyden – Brussels +32 (0)2 500 6552 [email protected] GAZETTE Axelle Van Den Broeck – Brussels +32 (0)2 500 1626 [email protected] FOCUS ON: Matthias Purnal – Brussels +32 (0)2 500 1550 [email protected] REAL ESTATE FUNDS AND INVESTMENT VEHICLES INTERNATIONAL Julia Gaspard – Paris +33 1 40 15 66 74 [email protected] KEY ISSUES FOR REAL ESTATE IN THE IMPLEMENTATION OF THE AIFMD ACROSS EUROPE ASIA Myriam Mejdoubi – Paris +33 (0)1 40 15 24 96 [email protected] UNDERSTANDING FOUR KEY CHANGES TO THE HONG KONG REIT CODE MIDDLE EAST Agostino Papa – Rome +39 06 68 8801 [email protected] EXPLORING FOREIGN INDIRECT INVESTMENT IN DUBAI’S REAL ESTATE MARKET
NORWAY Helen Hangari – Dubai +971 (0)4 438 6326 [email protected] INTRODUCING FOREIGN REAL ESTATE AIFS IN NORWAY SPAIN Ghassan Shuhaibar – Dubai +971 (0)4 438 6357 [email protected] SPANISH REITS TAKE OFF
US IRS CLARIFIES REIT DEFINITION OF “REAL PROPERTY” IN PROPOSED James Carter – Dubai +971 4 438 6316 [email protected] REGULATIONS
AUSTRALIA CHANGES TO FIRB APPROVAL Rutger Oranje – Amsterdam +31 (0)20 5419 810 [email protected] OF FOREIGN INVESTMENT IN AUSTRALIAN REAL ESTATE
ITALY LENDING BY INSURERS: NEW Patrick Keppenne – Amsterdam +31 (0)20 5419 239 [email protected] ITALIAN LEGISLATION SWEDEN PROVIDING A AVOIDING STAMP DUTY BY MEANS SNAPSHOT OF THE Juliet De Graaf – Amsterdam +31 (0)20 541 9 370 [email protected] OF CADASTRAL MEASURES EFFORTS OF NATIONAL UK RIGHTS TO LIGHT—A NEW DAWN GOVERNMENTS TO APPROACHING? IMPLEMENT THE AIFMD Camilla Wollan – Oslo +47 24 13 16 59 [email protected] María Alonso – Madrid +34 91 790 16 51 [email protected] Jesse Criz – Chicago +1 312 368 4074 [email protected] Benjamin Karr Briggs – Chicago +1 312 368 3479 [email protected] Robert Leduc – Minneapolis +1 312 368 7055 [email protected] Jane Xu – Melbourne – +61392745133 [email protected] David Marino – Milan +39 02 80 618 1 [email protected] Carlotta Benigni – Milan +39 02 80 618 631 [email protected] Luís Filipe Carvalho – ABBC law firm, Lisbon +351 21 358 36 20 [email protected] Mariana D’Almeida Ribeiro – ABBC law firm, Lisbon +351 213 583 620 [email protected] Diana Pronyushkina – Moscow +7 495 221 4413 [email protected] Gustaf Ström – DLA Nordic, Stockholm +46 8701 78 59 [email protected] Johan Forsling – DLA Nordic, Stockholm +46 8 769 79 39 [email protected] Tunay Yilmazlar – Istanbul +90 212 318 05 05 [email protected] Ben Barrison – London +44 (0)207 796 6184 [email protected]
Although this publication aims to state the law at 31 January 2015, it is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. If you would like further advice, please speak to Olaf Schmidt, Head of International Real Estate, on +39 02 80 618 504 or your usual DLA Piper contact on +44 (0) 8700 111 111. DLA Piper is an international legal practice, the members of which are separate and distinct legal entities. For further information please refer to www.dlapiper.com. Copyright © 2015 DLA Piper. All rights reserved.
2 | real estate gazette A Note From the Editor
The nineteenth issue very warm welcome to the first Real Estate Gazette of 2015. of the DLA Piper The repercussions of the financial crisis of 2008 continue to resonate Real Estate Gazette around the world. Of particular interest to readers of these pages is the resulting increase in regulations governing the activities of those involved Ain the investment market. As a major investment asset class, real estate is inevitably highlights issues affected. One of the most significant legal developments in this area is the Alternative relating to real estate Investment Fund Managers Directive 2011/61/EU (AIFMD), which aims to establish funds and investment uniform requirements governing the authorization, operations and supervision of AIF managers (which includes many managers of real estate funds), and to provide a vehicles. rational approach to the related risks and their impact on investors and markets in the European Union. This issue provides a snapshot of the efforts of national governments to implement the new measures.
Following an international overview, and a comparative table, the rest of the articles in our focus section discuss a variety of issues relating to the AIFMD, and international investment generally, in individual jurisdictions. One of the themes underlying these articles is the continuing uncertainty that surrounds certain aspects of the AIFMD’s implementation. In Belgium, for example, there is a lack of clarity around the pre- marketing rules applicable under the AIFMD (see page 20) whilst significant issues in the Netherlands are whether and, if so, how often, depositaries are required to carry out an independent asset verification (page 28), and whether or not the directive applies to Dutch REITs (see page 30).
DLA Piper’s strength in looking at legal problems from all angles is apparent in the breadth of material covered in these articles. From pre-marketing activities to supervision of an AIF’s continuing operations to whether indeed a market participant falls within the scope of the directive at all, it is clear that specialist legal advice is necessary to avoid the myriad potential breaches of the law in this area.
Other topics of interest in this issue include changes to FIRB approval of foreign investment in Australian real estate (page 37); new Italian legislation governing lending “Continuing by insurers (page 40); the growing trend in Sweden to avoid stamp duty by using cadastral procedures to effect real estate transactions (page 45); and finally, the impact uncertainty of rights to light issues on development schemes in England (page 49). surrounds aspects We do hope you will enjoy reading our views on these diverse issues, and if you of the AIFMD’s would like to discuss any of the topics featured in this issue, please do get in touch. implementation You can find contact details for all our contributors on the opposite page. ” Olaf Schmidt, Head of International Real Estate ISSUE 19 • 2015 | 3 CONTENTS
REAL ESTATE FUNDS AND INVESTMENT VEHICLES international 06 KEY ISSUES FOR REAL ESTATE IN THE IMPLEMENTATION OF THE AIFMD ACROSS europe ASIA 18 UNDERSTANDING FOUR KEY CHANGES TO THE HONG KONG REIT CODE BELGIUM 20 UNCERTAINTY IN BELGIUM’S PRE-MARKETING RULES UNDER THE 06 AIFMD FRANCE 22 FRENCH OPPCI VEHICLES : MORE FLEXIBLE AND STILL TAX EFFICIENT ITALY 24 SICAFS INTRODUCED IN ITALY AS REGULATED INVESTMENT VEHICLES MIDDLE EAST 26 eXPLORING FOREIGN INDIRECT INVESTMENT IN DUBAI’S REAL ESTATE MARKET THE NETHERLANDS 20 28 tHE OBLIGATION OF DEPOSITARIES TO VERIFY OWNERSHIP UNDER THE AIFMD 30 IS THE AIFMD APPLICABLE TO DUTCH REITS? NORWAY 31 INTRODUCING FOREIGN REAL ESTATE AIFS IN NORWAY SPAIN 33 SPANISH REITS TAKE OFF US 34 IRS CLARIFIES REIT DEFINITION OF “REAL PROPERTY” IN PROPOSED 30 REGULATIONS 4 | real estate gazette Issue 19, 2015
general REAL ESTATE
AUSTRALIA
37 CHANGES TO FIRB APPROVAL OF FOREIGN INVESTMENT IN
AUSTRALIAN REAL ESTATE
ITALY
40 LENDING BY INSURERS: NEW ITALIAN LEGISLATION
41 taX BENEFITS RESERVED TO BANKS NOW EXTENDED TO INSURANCE 37 COMPANIES ACTING AS LENDERS
PORTUGAL
42 PORTUGAL’S POSITION IN THE EUROPEAN INVESTMENT MARKET
RUSSIA
43 RUSSIA CONTINUES TO LEGISLATE FOR THE ALLOCATION OF STATE- OWNED LAND FOR CONSTRUCTION 42 SWEDEN
45 aVOIDING STAMP DUTY BY MEANS OF CADASTRAL MEASURES
TURKEY
47 NEW LAW REGULATING RETAIL BUSINESSES
UK 49 RIGHTS TO LIGHT—A NEW DAWN APPROACHING? 49 ISSUE 19 • 2015 | 5 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | INTERNATIONAL
KEY ISSUES FOR REAL ESTATE IN THE IMPLEMENTATION OF THE AIFMD ACROSS EUROPE CATHERINE POGORZELSKI, LUXEMBOURG AND HENDRIK BENNEBROEK GRAVENHORST, AMSTERDAM
ntroduction conditions and comply with transparency of EU AIFs managed by the AIFMs and Alternative investment fund and reporting requirements. the management of EU AIFs established managers (AIFMs) are responsible The AIFMD therefore aims at in member states other than the for the management of a large establishing common requirements home member state of the AIFM. The Iproportion of invested assets in the governing the authorization and AIFMD also provides for the conditions European Union and can exercise a supervision of AIFMs in order to provide subject to which authorized EU AIFMs significant influence on markets. an internal market for AIF management, are entitled to market non-EU AIF to The impact of AIFMs on the markets in a coherent approach to the related professional investors in the Union and which they operate is largely beneficial, but risks and their impact on investors and the conditions subject to which a non-EU recent financial difficulties have underlined markets, and a harmonized and stringent AIFM can obtain an authorization to how the activities of AIFMs may also serve regulatory framework for the activities of manage EU AIFs and/or to market AIFs to spread or amplify risks. Uncoordinated all AIFMs within the EU, including those to professional investors in the Union national responses make the efficient which have their registered office in a with a “passport”. management of those risks difficult. member state and those which have their Each member state of the European Since 22 July 2013, Directive 2011/61/ registered office in a third country. Economic Area is adopting or has EU of the European Parliament and of The authorization of EU AIFMs covers adopted legislation implementing the the Council of 8 June 2011 on AIFMs the management of EU AIFs established AIFMD into national law. (AIFMD) requires managers of alternative in the home member state of the In the following pages we have invited investment funds (AIFs), including AIFM. Subject to further notification DLA Piper’s specialists to address some managers of real estate AIFs, to obtain requirements, this also includes marketing of the key questions that are relevant for authorization, meet ongoing operating to professional investors within the EU AIFMs of real estate AIFs on a country by
6 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | international
“The definition of ‘marketing’ does not include reverse solicitation or passive marketing. ” country basis highlighting member states’ and Markets Authority definition or governance framework, for gold standard provisions. “Level 2 measures” means the such placements in the European Union Commission delegated regulation (EU) or outside Glossary No 231/2013 of 19 December 2012 “Sub-threshold AIFM” means a small AIFM “AIF” means alternative investment fund supplementing the AIFMD benefiting from thede minimis exemption “AIFM” means alternative investment “Marketing”, within the meaning of available under article 3(2) (a) or 3(2) (b) fund manager the AIFMD, means a direct or indirect “AIFMD” means Directive 2011/61/EU offering or placement of units or shares of the AIFMD and which is therefore only of the European Parliament and of the in an AIF that an AIFM manages, at the required to comply with the AIFMD (and Council of 8 June 2011 on AIFMs initiative of the AIFM or on its behalf, its specific member state’s implementing “Carried interest” also known as a to or with investors domiciled or with law) in respect of the registration and “promoted interest” (or, in the real a registered office in the EU. It is worth reporting obligations but does not estate industry, a “promote”), within noting that this does not include reverse benefit from the marketing passport the meaning of the AIFMD, means a solicitation or passive marketing, which “UCITS Directive” means the Directive share in the profits of the AIF accrued consists of a request for information or 2009/65/EC of the European Parliament to the AIFM as compensation for the investment made at the initiative of the management of the AIF and excluding investor itself and of the Council of 13 July 2009 on any share in the profits of the AIF “NAV” means net asset value the coordination of laws, regulations accrued to the AIFM as a return on any “Private placement” usually defined, with and administrative provisions relating to investment into the AIF by the AIFM respect to marketing, is the opposite of undertakings for collective investment in “ESMA” means the European Securities a public offering. There is no harmonized transferable securities (UCITS), as amended
ISSUE 19 • 2015 | 7 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | INTERNATIONAL
BELGIUM
CONTACTS
Koen Vanderheyden Axelle Van Den Broeck ([email protected]) ([email protected])
General Questions topic Scope Has the AIFMD been The AIFMD was implemented in Belgium by the Law of 19 April 2014 (the AIFM Law) which came into implemented in your force on 27 June 2014. country? If so, when? Execution decrees have not yet been issued.
Is there a distinction The existing REIFs (known as “sicafi”/ “vastgoedbevak”) qualify as alternative investment funds within between or carve-out the scope of the AIFM Law. However, as it was argued that the AIF framework did not provide any from the AIFMD for REITs, added value for REIFs and did not correspond to the economic reality, a new vehicle was introduced in real estate investment Belgium with the Law of 12 May 2014 on Regulated Real Estate Companies (known as “gereglementeerde funds (REIFs), real estate vastgoedvennootschappen”/ “sociétés immobilières réglementées”), in addition to the existing legal framework. holding companies or Regulated real estate companies are still subject to the supervision by the Financial Services and Markets similar structures in your Authority (FSMA), are subject to leverage and risk diversification restrictions and distribution requirements, country? and benefit from the same tax status as REIFs. The former REIF regime remains in place and is governed by the AIFM Law, the Law of 3 August 2012 on collective investment undertakings and the Royal Decree of 7 December 2010 on real estate investment companies. In practice, all REIFs have opted for the new status of regulated real estate company, meaning that they fall outside the scope of the AIFM Law. Valuation How have the valuation The rules on valuation in the AIFM Law are in line with the rules on valuation in the AIFMD. rules and standards been The valuation may be performed by an AIFM or by an external valuer. In addition to several general implemented in respect requirements, specific rules apply to valuations performed by an external valuer. Furthermore, the AIFM of alternative real estate Law contains specific rules on the AIFM’s liability in connection with the valuation of assets. Supervision is funds? conducted by the FSMA.
Remuneration Is promote/carried Belgian law does not provide for a specific rule which classifies carried interest as variable remuneration. interest typically or The FSMA specifically refers to the ESMA guidelines on sound remuneration policies under the AIFMD in specifically picked up in its Circular FSMA_2014_10 dd.29/09/2014 and interprets any provisions on remuneration in the AIFM Law the variable part or is it in line with such guidelines. treated otherwise? Reference should be made to the ESMA Guidelines and in particular paragraphs 11 and 13.
Depositary Has your country Yes. The AIFM Law provides for a Royal Decree to allow non-banking institutions to perform depositary implemented the option functions. The Decree has not yet been published but it could allow AIFs with no redemption rights to permit non-banking exercisable during the first five years and whose core investment policy is not to invest in assets that must institutions to perform be held on deposit or to invest in issuers or non-listed companies in order to acquire those companies, to the depositary functions appoint a depositary in relation to a Belgian AIF, which is not a credit institution or an investment firm. in respect of real asset If the AIF is established in another member state, the depositary may be an entity, registered under the AIFs? terms of its national legislation, which carries out depositary functions as part of its professional or business activities. It must also provide sufficient financial and professional guarantees to enable it to perform its depositary functions effectively. For non-EU AIFs only, the depositary may also be a credit institution or any other entity of the same nature as a credit institution or an investment firm provided that the depositary is subject to effective prudential regulation, including minimum capital requirements, and supervisory rules which have the same effect as EU law and are effectively enforced.
Marketing Did your country uphold Yes, the de minimis regime provided for in article 3(2) of the AIFMD is available for all Belgian AIFMs, its private placement irrespective of whether they relate to EU or non-EU AIFs. regime in respect of EU AIFs managed by sub- threshold EU AIFMs and non-EU AIFMs; as well as non-EU AIFs?
See page 20 of this issue for a detailed look at Belgium’s pre-marketing rules under the AIFMD.
8 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | international
Denmark
CONTACTS
assisted by Michael Neumann Kristian Kaltoft Nielsen ([email protected]) ([email protected])
General Questions topic Scope Has the AIFMD been The AIFMD was implemented by the Danish Alternative Investment Fund Managers Act of 22 June 2013 implemented in your (AIFMA) and delegated regulations. The AIFMA provided for a grace period of 12 months and by 22 July country? If so, when? 2014 all parties subject to the AIFMA were required to comply fully with the AIFMA. Is there a distinction The definition of an AIF in the AIFMA follows that given in the AIFMD and there is no statutory exemption between or carve-out from the AIFMA for REIFs or similar entities. However, an entity whose purpose is to implement a from the AIFMD for REITs, commercial business strategy will not be classified as an AIF but as a commercial business, if the commercial real estate investment activity of the entity is to i) purchase, sell or exchange goods or commodities or providing non-financial funds (REIFs), real estate services, or ii) the entity primarily performs an industrial activity, which entails production of goods or holding companies or construction of buildings. similar structures in your According to FSA guidance, if the primary activities and the administration of the real estate entity are country? focused on operating real estate, including administration, rent collection and property maintenance, that entity will not be subject to the AIFMA. If, however, the activities of the real estate entity are primarily focused on investing in and developing real estate, that entity will be subject to the AIFMA. Moreover, construction companies and developers who, for a shorter or longer period of time, hold real estate on their (group) balance sheets with the intent to sell it at a later time, will not be subject to the AIFMA. Valuation How have the valuation Denmark applies the general rules for all funds laid down in the AIFMD regarding valuation performed by rules and standards been alternative real estate funds. implemented in respect An AIFM must establish appropriate procedures for the proper, consistent and independent valuation of of alternative real estate each AIF’s assets (including real estate funds). Valuation of assets must be performed at least once a year. funds? This can be performed by either the manager itself or by an external valuer, although the FSA must be informed when external valuers are used, and any external valuer used must be professionally qualified, competent, and his appointment must comply with the requirements of the AIFMA. The external valuer must be independent of the AIF, its manager, and any other parties closely linked to the AIF. Remuneration Is promote/carried Carried interest is generally classified as variable remuneration under the AIFMA and subject to the interest typically or restrictions on variable remuneration. However, the AIFMA provides for certain exemptions, where: specifically picked up in • the AIF has repaid the invested capital to investors and an amount equal to the predetermined rate of the variable part or is it return of the invested capital prior to payment of carried interest to management members or other treated otherwise? employees whose activities have a material impact on the manager’s risk profile or the risk profile of the AIFs (key employees), and the carried interest is subject to claw-back until the liquidation of the relevant AIF; or • the AIFs invest in assets with a long investment horizon and predictable cash flows (including real estate), and the carried interest is paid to management members or key employees prior to the repayment of the investors including an amount equivalent to the predetermined rate of return on the invested capital. It must be unambiguously established at the time of payment of the carried interest that the funds available allow for refund of the invested capital as well as the predetermined rate of return to the investors within an agreed time frame, and that the carried interest is subject to claw-back until the liquation of the relevant fund. Depositary Has your country Yes. Non-banking entities that perform depositary functions as a part of their professional or commercial implemented the option activities and are subject to registration by law for such activities can perform depositary functions for AIFs to permit non-banking which i) in accordance with their investment policy do not primarily invest in assets which are held on institutions to perform deposit and where the investors cannot redeem its shares or units of the AIF within the first five years; or the depositary functions ii) which primarily invest in non-listed companies with the aim of acquiring a controlling interest in those in respect of real asset companies. Non-banking entities that intend to perform depositary functions must be able to provide AIFs? sufficient financial and professional guaranties in order to secure effective performance of their depositary functions. Moreover, these entities must have liability insurance (to cover an amount of at least EUR 730,000. The FSA has established a registry of such depositary entities. Marketing Did your country uphold Sub-threshold EU AIFMs cannot currently market units or shares of AIFs in Denmark. its private placement Both EU AIFMs and non-EU AIFMs can apply for specific authorization to market units or shares of non-EU regime in respect of EU AIFs in Denmark to professional investors. Non-EU AIFMs can apply for authorization to market units or AIFs managed by sub- shares of EU AIFs in Denmark to professional investors, provided that they have a permit to manage those threshold EU AIFMs and EU AIFs in an EU/EEA member state. non-EU AIFMs; as well as non-EU AIFs?
ISSUE 19 • 2015 | 9 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | INTERNATIONAL
FRANCE
CONTACTS
assisted by Fabrice Armand Johanna Monthe Dibril Sako ([email protected]) ([email protected]) ([email protected])
General Questions topic Scope Has the AIFMD been The AIFMD was implemented in France by an ordinance (ordonnance) and a decree (décret) both dated implemented in your 25 July 2013 amending the legal framework applicable to asset management. In addition, the General country? If so, when? Regulations of the French Financial Markets Authority (AMF) have been amended. The new legal framework came into force on 22 July 2014.
Is there a distinction Under French law, there is no specific distinction or carve-out from the AIFMD for REITs, REIFs, or similar between or carve-out structures. These structures would in principle be subject to the rules implementing the AIFMD provided from the AIFMD for REITs, the relevant criteria are met. Cases are assessed on an individual basis. real estate investment funds (REIFs), real estate holding companies or similar structures in your country? Valuation How have the valuation The valuation rules set out in the AIFMD have been implemented in France. No specific additional rules and standards been obligations have been provided in respect of real estate funds. implemented in respect The AIFM must ensure that the valuation of the AIF’s assets is performed impartially and with all due of alternative real estate skill, care and diligence. The AIFM is responsible for the accurate valuation of the AIF’s assets, as well the funds? calculation and publication of the asset value per unit/share. The AIFM must ensure that the assets of any AIF it manages are valued at least once or twice a year, depending on the nature of the investment vehicle. The AIFM may perform the valuation function itself or delegate this task to a third party expert. If the AIFM carries out this function itself, it must ensure that the valuation function is independent from portfolio management and that no conflict of interest arises. The rules are more flexible for sub-threshold AIFMs. If the AIFM appoints an external valuer, the external valuer must be approved by the AMF (if the AIFM is French) and be an independent expert. The AIFM remains liable for the valuation of the assets even where a third party expert was appointed.
Remuneration Is promote/carried Carried interest is specifically included in the more general provisions on remuneration that are targeted by interest typically or AIFM rules in France. Therefore, principles of proportionality, deferred payments, etc. are expressly applied specifically picked up in to carried interest. Further, depending on the AIFM’s size, a remuneration committee may have to be the variable part or is it appointed. treated otherwise? It should be noted that France has a specific pre-AIFMD regime applicable to carried interest, that remains applicable in order for the AIFM to benefit from tax rebates.
Depositary Has your country France allows a limited number of non-banking institutions to act as depositaries, as follows: implemented the option • credit institutions; to permit non-banking • investment firms authorized to provide safekeeping and administration of financial instruments services; institutions to perform • insurance companies; the depositary functions in respect of real asset • branches of EU-based credit institutions or investment firms authorized in their home country to provide AIFs? depositary services; • other French public entities (Banque de France, Caisse des dépôts et consignations).
Marketing Did your country uphold There is no specific private placement regime available for sub-threshold EU AIFMs and non-EU AIFMs in its private placement France. Therefore, they have to be authorized by the AMF before they can market shares of an AIF in France. regime in respect of EU AIFs managed by sub- threshold EU AIFMs and non-EU AIFMs; as well as non-EU AIFs?
See page 22 of this issue for a discussion of how the implementation of the AIFMD has impacted French real estate collective investment vehicles (OPCIs).
10 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | international
italy
CONTACTS
assisted by Dibril Sako Agostino Papa Andrea Tonon Nicoletta Alfano ([email protected]) ([email protected]) ([email protected]) ([email protected])
General Questions topic Scope Has the AIFMD been Implementation in Italy is still ongoing. implemented in your The Unified Financial Act was amended on 4 March 2014. Further, the draft regulations from the Ministry of country? If so, when? Finance have been put out for public consultation and the final version should be issued in early 2015. The regulations drafted by the Bank of Italy and Consob have been published and will come into force after the Ministry of Finance has issued its own regulations. All those falling within the scope of the AIFMD implementation must comply with the new regime by 30 April 2015.
Is there a distinction REIFs are categorized as AIFs.The Italian entities which are most similar to REITs are the SIIQ (società between or carve-out di investimento immobiliare quotata, or listed real estate investment company) and the SIINQ (società di from the AIFMD for REITs, investimento immobiliare non quotata, or unlisted real estate investment company). Neither of these qualifies real estate investment as an AIF. funds (REIFs), real estate The main characteristics of an SIIQ are: (i) it is listed on a regulated market and subject to supervision by holding companies or Consob; (ii) if listed on the MTA/Expandi markets, it must have share capital of at least EUR 40 million; (iii) similar structures in your no shareholder can hold shares representing more than 60% of the voting rights and more than 60% of the country? dividend rights; (iv) at least 25% of the shares of an SIIQ must be owned by shareholders who each own no more than 2% of the voting rights or more than 2% of the dividend rights; (v) it must be involved mainly in the leasing of real estate (real estate rented to third parties must represent at least 80% of its assets and the income deriving from rentals must represent at least 80% of its total income); and (vi) at least 80% of an SIIQ’s net profit deriving from rentals must be distributed to shareholders. Real estate holding companies qualify as AIFs if their primary purpose is the investment of assets, collected through the issue of their shares (or other equity instruments) to a number of investors, managed as a whole in the interest of their investors and independently from them, mainly in real estate on the basis of a predetermined investment policy. Certain exceptions are provided.
Valuation How have the valuation Italian laws and regulations, even before the implementation of the AIFMD, provided detailed rules for the rules and standards been valuation of assets of real estate AIFs. implemented in respect The AIFM must establish appropriate and consistent procedures for the proper and independent valuation of alternative real estate of the assets of real estate funds. Valuation must be performed by an expert independent valuer who is funds? competent to carry out that role. The AIFM is responsible for the valuation, especially when, as it is empowered to do, it deems that the valuation carried out by the external valuer is not in line with the real value of the assets. Additional rules may be imposed by the secondary regulations that have yet to come into force. Remuneration Is promote/carried Secondary regulations are yet to come into force, however ESMA Guidelines on fair remuneration interest typically or policies under the AIFMD are directly applicable. Promote/carried interest are included in the variable part specifically picked up in according to the remuneration rules. the variable part or is it treated otherwise?
Depositary Has your country Yes, the depositary may be an Italian bank, the Italian branch of an EU bank, an Italian investment company implemented the option or the Italian branch of an investment company. to permit non-banking institutions to perform the depositary functions in respect of real asset AIFs?
Marketing Did your country uphold Sub-threshold AIFMs, whether Italian, EU or non-EU, do not benefit from a different set of rules in the area its private placement of marketing and the offering of units/shares of the relevant AIFs (again whether they are Italian, EU or regime in respect of EU non-EU). AIFs managed by sub- threshold EU AIFMs and non-EU AIFMs; as well as non-EU AIFs?
ISSUE 19 • 2015 | 11 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | INTERNATIONAL
Luxembourg
CONTACT
Catherine Pogorzelski ([email protected])
General Questions topic Scope Has the AIFMD The AIFMD has been implemented in Luxembourg by the Law dated 12 July 2013 on alternative investment fund managers been implemented (which we will call the AIFM Law). in your country? If Luxembourg’s regulator, the Commission de Surveillance du Secteur Financier (CSSF), has issued a Frequently Asked Questions so, when? document in respect of the AIFM Law, the latest version of which was published on 29 December 2014. Is there a distinction Luxembourg has not implemented any specific regime for real estate fund platforms or real estate fund managers between or carve- which will be treated as AIF and AIFM to the extent that the relevant criteria laid down in the AIFM Law are met. out from the AIFMD The definition of an “AIF” given in the AIFM Law covers AIFs which are established in Luxembourg, or in another EU for REITs, real estate member state, or in a third country, irrespective of the asset class involved. investment funds An AIF is any collective investment vehicle which, under article 1(39) of the AIFM Law (in the case of a Luxembourg- (REIFs), real estate based AIF) or under article 4(1)(a) of the AIFMD (in the case of an AIF established in another EU member state or in holding companies a third country) (i) raises capital from a number of investors, with a view to investing it in accordance with a defined or similar structures investment policy for the benefit of those investors; and (ii) does not require authorization pursuant to article 2(1) in your country? of the Law of 2010, respectively article 5 of the UCITS Directive). It is up to each collective investment vehicle to determine whether or not it falls within the definition of an AIF, as provided by the AIFM Law. The guidelines on key concepts of the AIFMD and the FAQs issued by ESMA are to be taken into account in assessing whether the criteria are met. Valuation How have the Luxembourg has not implemented any specific provisions on valuation other than those provided by the AIFM Law, and valuation rules refers to Level 2 Measures to supplement those rules. Valuations of real estate assets is to be performed either by: and standards • An independent and suitably qualified external valuer (who must hold a professional registration), whose appointment been implemented must be notified to the CSSF. Delegation of the valuation function to a third party is limited; or in respect of • The AIFM itself (provided the function is independent of portfolio management and policies are put in place to avoid alternative real potential conflicts of interest). The CSSF has the authority to require any such AIFM to have its valuation procedures and/ estate funds? or the valuations themselves verified by an external valuer or an independent auditor. In practice, most AIFMs do keep the valuation function in-house, and use external valuations as merely one source, along with an internal valuation, to determine the value of their real estate assets. In these circumstances, the valuation remains internal, and external valuers will not be subject to the special liability regime provided for under the AIFM Law. In addition it is worth noting, that under the AIFM Law, the rules applicable to the valuation of assets and the calculation of the NAV are subject to the law of the country where the AIF is established and/or in the AIF management regulations or incorporation documents. In other words, Luxembourg has not imposed any valuation rules, allowing the AIFM to follow accepted valuation standards. Remuneration Is promote/carried Luxembourg did not apply any gold-plating to the remuneration rules set out in the AIFMD. Hence, the ESMA guidelines interest typically or on fair remuneration policies are taken into consideration. specifically picked Promote and carried interest are per se variable and deferred as long as they do not represent a pro rata return on up in the variable an investment by the relevant staff members (directly or through a carried interest vehicle) meaning that the variable part or is it treated remuneration should partly be paid upfront (short-term) and partly deferred (long-term). otherwise? It is worth noting that the AIFM Law allows an AIFM to disapply certain requirements in light of the proportionality principle allowing adequate consideration of the size, internal administration and nature, scope and complexity of the activities of the AIFM. Depositary Has your country Yes. The depositary may be (i) a credit institution, (ii) an investment firm within the meaning of the amended Law of 5 implemented the April 1993 on the financial sector, or (iii) for AIFs established in Luxembourg, which, in accordance with their investment option to permit non- policy do not primarily invest in assets which are held on deposit and where the investors cannot redeem shares or banking institutions units of the AIF within the first five years; or which primarily invest in non-listed companies with the aim of acquiring to perform the a controlling interest in those companies, the depositary may also be an entity which has the status of a professional depositary functions depositary of assets other than financial instruments within the meaning of article 26-1 of the amended Law of 5 April in respect of real 1993 on the financial sector. asset AIFs? In other words, closed-ended real assets AIFs will be entitled to benefit from this option (as opposed to open-ended AIFs). Marketing Did your country Yes. Luxembourg private placement rules applicable before the coming into force of the AIFM Law continue to apply uphold its private with respect to sub-threshold EU AIFMs managing EU AIFs subject to compliance with the existing requirements. Certain placement regime new requirements apply to sub-threshold non-EU AIFMs and sub-threshold EU AIFMs managing non-EU AIFs. in respect of EU From 2013 until July 2015, non-EU AIFs and EU AIFs managed by non-EU AIFMs may continue to be marketed in AIFs managed by Luxembourg under the national private placement regime subject to compliance with certain additional conditions as sub-threshold EU set out in the AIFM Law. From July 2015 until 2018, the passport regime will co-exist with the private placement regime. AIFMs and non-EU Thereafter, the private placement regime is expected to be replaced entirely by the passport regime. AIFMs; as well as In addition it is worth noting that subject to compliance with domestic private placement rules, marketing to retail non-EU AIFs? investors in Luxembourg is permitted provided that the AIF is subject to permanent supervision by either the CSSF or the supervisory authority of the home member state or a third country considered to provide an equivalent standard of supervision as that of the CSSF. For non-regulated Luxembourg AIFs, marketing in Luxembourg may only be directed to professional investors.
12 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | international
Netherlands
CONTACT
Hendrik Bennebroek Gravenhorst ([email protected])
General Questions topic Scope Has the AIFMD been The AIFMD was implemented by the Dutch Financial Supervisions Act (FSA) and delegated implemented in your regulations were promulgated on 22 July 2013. From that date a year of transition commenced during country? If so, when? which all market parties had to assess whether or not they fall within the scope of the AIFMD. As of 22 July 2014 all parties which are governed by the AIFMD must comply with the new regime. Is there a distinction The definition of a Dutch REIT incorporates Dutch listed real estate companies like Corio N.V., NSI N.V. between or carve-out Unibail-Rodamco S.E., VastNed Retail N.V. and Wereldhave N.V. from the AIFMD for REITs, Their characteristics are that: (i) they are listed on a stock exchange; (ii) they are not open-ended; (iii) they real estate investment implement a corporate strategy and not a defined investment policy; (iv) there is active involvement in day to funds (REIFs), real estate day management; (v) they have various stakeholders such as shareholders, tenants and employees; not solely holding companies or or primarily investors. similar structures in your Dutch REITs often claim that the AIFMD is not applicable to them. Although there is no statutory exemption country? from the AIFMD for these entities, and nor has the Dutch regulator stated that they are exempt, none of these Dutch REITs have applied for authorization under the AIFMD. Valuation How have the valuation The valuation of assets of real estate AIFs may be performed by an AIFM or by an external valuer. The Authority rules and standards been for Financial Markets (AFM) will provide supervision, probably in cooperation with the Dutch Central Bank (DNB). implemented in respect The AIFMD provides that AIFMs must establish appropriate and consistent procedures for the proper and of alternative real estate independent valuation of the assets of real estate funds. AIFMs must ensure that the rules applicable to the funds? valuation of assets and the calculation of the NAV per unit or share in a real estate fund are followed. Both the assets and the NAV must be valued at least once a year. Unit holders must be kept informed. If an external valuer performs the valuation, an AIFM must demonstrate that the external valuer holds professional registration, is competent, and that the appointment complies with the requirements of the AIFMD. The valuer must be independent of the fund, the relevant AIFM, or any other persons with close links to the fund. This duty may not be delegated to a third party. A depositary cannot be appointed as an external valuer, unless the functions are separated. An AIFM may also perform the valuation itself, although in that case the valuation task must be functionally independent from portfolio management and the remuneration policy (and the relevant managers of the AIF should consider conservative valuation policies). Conflicts of interest and undue influence affecting the employees must be prevented. Any potential liability in connection with an improper valuation in respect of a real estate AIF and the unit holders in the real estate fund will lie with the AIFM. This applies even where an external valuer has been appointed though the an external valuer may be liable for all losses suffered by the AIFM where there has been a breach of duty or negligence. This liability cannot be excluded by contract. Remuneration Is promote/carried Dutch law does not provide for a specific rule which classifies carried interest as variable remuneration. However, a interest typically or draft bill regarding remuneration which has yet to be implemented, provides definitions of “fixed remuneration” and specifically picked up in “variable remuneration” as follows: the variable part or is it Fixed remuneration is: the share of the total remuneration which consists of unconditional financial or non-financial treated otherwise? benefits as specified in the remuneration policy of the undertaking or in agreements as to the undertaking’s purpose. Variable remuneration is: the share of the total remuneration which is not fixed remuneration. Importantly, the Bill provides detailed rules on the remuneration of all employees (ie, not only identified staff).
Depositary Has your country Yes. In addition to the list of entities entitled to function as depositaries under article 21(3) of the AIFMD, article implemented the option 21(3)(c) of the AIFMD entitles the member states to appoint non-prudentially supervised entities as possible to permit non-banking depositaries for assets other than financial instruments. This exception is of particular importance for real estate institutions to perform AIFs. The Dutch legislation repeats the requirements provided for in article 21(3)(c) of the AIFMD. the depositary functions In the Netherlands certain trust service providers advertise their services as depositaries for real estate AIFs. These in respect of real asset market participants are well placed to fulfil the role of depositary under the directive, as in many cases they already AIFs? manage the legal entity in the AIF structure which safeguards the legal titles of real estate assets. Several of these trust entities were appointed as depositaries in AIFMD permits which have recently been granted by the AFM. Marketing Did your country uphold its The de minimis regime provided for in article 3(2) of the AIFMD is only available to AIFMs whose home private placement regime in state jurisdiction is the Netherlands. respect of EU AIFs managed by sub-threshold EU AIFMs and non-EU AIFMs; as well as non-EU AIFs?
See page 28 of this issue for details of the obligation on depositaries to verify assets, and page 30 for a more detailed discussion of Dutch REITs and the AIFMD.
ISSUE 19 • 2015 | 13 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | INTERNATIONAL norway
CONTACT
Camilla Wollan ([email protected])
General Questions topic Scope Has the AIFMD been The AIFMD was incorporated into Norwegian legislation by the Alternative Investment Fund Act of 20 June implemented in your 2014 (AIF Act) and regulations of 26 June 2014 (AIF Regulation). From that date a six-month transition country? If so, when? period commenced during which all market participants had to assess whether or not they fall within the scope of the AIFMD. As of 1 January 2015 all parties which are governed by the AIFMD must comply with the new regime. According to the Norwegian Financial Supervisory Authority (FSA), the following ESMA guidelines apply: • guidelines on key concepts of the AIFMD • guidelines on sound remuneration policies under the AIFMD • guidelines on reporting obligations under articles 3(3)(d) and 24(1), (2) and (4) of the AIFMD Is there a distinction The terms REITs and REIFs are not commonly used in Norway. between or carve-out There is no statutory exemption from AIF Act for real estate companies or funds, nor has the Norwegian from the AIFMD for REITs, regulator expressly stated that they are exempt. It is up to each real estate company or fund to assess real estate investment whether it is governed by the AIMFD. Usually a listed real estate company has a general commercial funds (REIFs), real estate purpose and implements a corporate strategy rather than a defined investment policy. For these companies holding companies or management is actively involved in the day-to-day management through actively operated property similar structures in your portfolios, acquiring real estate, improving and developing property projects and managing tenancy country? relationships and various stakeholders that may be involved, and as such, they do fall within the scope of the AIF regime. However, each undertaking does have to be assessed on an individual basis. Going forward, it seems likely that the Norwegian regulator will look to the EU and ESMA for further guidance. Valuation How have the valuation The AIF Act provides that AIFMs must establish appropriate and consistent procedures for the proper rules and standards been and independent valuation of the assets of real estate funds. They must ensure that the valuation of assets implemented in respect and the calculation of the NAV be performed regularly and at least once a year. This valuation may be of alternative real estate performed by an AIFM or by an external valuer. Detailed requirements with respect to the valuation are funds? provided by the AIF Regulation. The AIFM must inform the holders of units of the valuation. Additional rules were introduced regarding the liability of AIFMs in connection with the correct valuation of assets. The manager is required to inform the Norwegian FSA about any outsourcing of the valuation function. Remuneration Is promote/carried Taking “carried interest” to mean variable remuneration, we note that the definition of “carried interest” as interest typically or set out in article 4(1)(d) of the AIFMD has been incorporated in the Norwegian AIF Act. specifically picked up in the variable part or is it treated otherwise? Depositary Has your country Yes. The depositary function may be performed by the list of entities set out in article 21(3) of the AIFMD implemented the option as implemented by section 5-1 of the AIF Act. The Norwegian FSA may also approve non-prudentially to permit non-banking supervised entities as possible depositaries for assets other than financial instruments where the terms institutions to perform set out in the AIF Regulation are met. The Norwegian FSA is currently considering applications from the depositary functions undertakings to be approved according to this rule. in respect of real asset AIFs?
Marketing Did your country uphold Yes, the private placement regime applicable to managers whose home state jurisdiction is Norway and the its private placement same thresholds as set out in the article 3(2) of the AIFMD have been incorporated. However, a sub-threshold regime in respect of EU AIFM requires a permit to market its AIFs (other than national funds) to non-professional investors. AIFs managed by sub- threshold EU AIFMs and non-EU AIFMs; as well as non-EU AIFs?
See page 31 of this issue for more details on Norway’s approach to implementing the AIFMD.
14 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | international poland
CONTACTS
Michał Pietuszko Paweł Białobok ([email protected]) ([email protected])
General Questions topic Scope Has the AIFMD been The AIFMD has not yet been incorporated into the Polish legal system. implemented in your As the implementation deadline expired in June 2013, the European Commission called on Poland on 26 country? If so, when? November 2014 to introduce new regulations and to present a report to the EC within two months of that request. On 14 January 2015 the draft Act was presented. It is structured as amendment to the Polish Act on investment funds dated 27 May 2004 and its goal is to implement AIFMD, directive 2014/91/UE, directive 2013/14/EU, and directive 2009/65/WE. The Polish regulator stated on 21 August 2013 that it is not possible to apply the terms of the AIFMD to any entities created and operating in Poland until the AIFMD has been fully implemented. However, since the relevant provisions of the AIFMD are directly applicable, Poland must ensure that any EU legal person (which, according to its domestic financial supervision authority, qualifies as an AIFM) is able to offer its units or shares to professional Polish investors. The date of final implementation of Polish legislation remains unknown and difficult to predict.
Is there a distinction REITs and REIFs are not regulated as separate legal structures/entities under Polish law. between or carve-out However, the Polish market allows for close-ended investment funds which invest in real estate. The from the AIFMD for REITs, business activity of these entities must comply with the statutory regime, eg, they may not invest more than real estate investment 25% of their assets in a single real estate project. funds (REIFs), real estate It appears that the new Act will include managers of these funds within its scope. holding companies or similar structures in your country? Valuation How have the valuation The draft rules on asset valuation correspond directly with those given in the AIFMD. In general, an AIFM rules and standards been is entitled to perform the valuation itself, if it ensures that the procedures followed are independent from implemented in respect portfolio management activities. of alternative real estate It is also open to the AIFM to appoint an external valuer. This valuer cannot be the same entity which funds? examines AIFM’s/AIF’s financial statements or which is its depository, unless: • The valuation activities are functionally separate from the other delegated duties; and • Any potential conflicts of interest are mitigated. The valuer must be notified to the Polish FSA who may require the AIFM to change its valuer, if it is of the opinion that the valuer is not providing valid and objective valuation services. The draft rules go on to provide that valuation should be conducted by at least three persons who are qualified real estate valuation experts. Remuneration Is promote/carried In Polish law there is no legal definition of “carried interest”. The term may refer generally to the parts of interest typically or remuneration which are variable and dependent on financial results. specifically picked up in According to the Polish legislators charged with implementing the AIFMD, AIFMs will have to set out their the variable part or is it remuneration policies for individuals who can substantially affect the risk management profile of the AIF (namely, treated otherwise? board members). The remuneration policy should be appropriate to the structure of the particular AIF and its manager, and flexible. Forthcoming regulations are expected to detail requirements for the AIF’s policy on risk management. Depositary Has your country Yes. Polish regulation will allow AIFMs to conclude depository agreements with: (i) domestic banks, (ii) implemented the option Polish branches of credit institutions, and (iii) the Polish National Depository for Securities (in Polish: Krajowy to permit non-banking Depozyt Papierów Wartościowych). institutions to perform the In addition, the manager of a (real estate) close-ended investment fund may also appoint as its depository depositary functions in a brokerage firm with a registered capital at least of EUR 730,000. The firm must be authorized to perform respect of real asset AIFs? investment services and various other activities relating to financial instruments. Marketing Did your country uphold The draft regulations implementing the AIFMD state that the de minimis regime provided for in the AIFMD its private placement is to be applied only to AIFMs whose registered office is in Poland. regime in respect of EU AIFs managed by sub- threshold EU AIFMs and non-EU AIFMs; as well as non-EU AIFs?
ISSUE 19 • 2015 | 15 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | INTERNATIONAL spain
CONTACTS
assisted by Ignacio Gomez-Sancha Marta Montalbán Jaime Denis del Campo ([email protected]) ([email protected]) ([email protected])
General Questions topic Scope Has the AIFMD been implemented Prior to the implementation of the AIFMD, all open-ended funds and managers were regulated under in your country? If so, when? Act 35/2003, of 4 November, on Collective Investment Schemes (CISA), while only some close-ended funds and managers fell under Act 25/2005. Although the AIFMD was incorporated into Spanish law by Act 22/2014 on 12 November 2014, on Private Equity Funds, Managers and other Closed-ended Collective Investment Schemes (PEA), the dual approach described above was retained: CISA, amended by PEA, still provides the regulatory framework for all open-ended funds and managers; and PEA covers all close-ended fund managers. Is there a distinction between Yes. In 2009 a specific regulatory framework was enacted for listed real estate investment companies or carve-out from the AIFMD (SOCIMIs) through Act 11/2009. In addition to the special tax regime provided by the Act, it for REITs, real estate investment also provides for an express authorization which distinguished between SOCIMIs and real estate funds (REIFs), real estate holding investment funds under CISA (ie, open-ended real estate collective investment schemes), indicating companies or similar structures in that SOCIMIs are a different type of investment vehicle. your country? Consistent with this interpretation, PEA expressly excludes SOCIMIs from its scope. Valuation How have the valuation rules and Open-ended AIFs: standards been implemented in CISA provides that the value of open-ended AIFs must be assessed at least once a year by a real respect of alternative real estate estate valuation entity (“authorized RE valuer”), applying the valuation criteria set out under Order funds? ECO/805/2003. Close-ended AIFs: In contrast to the specific regulatory approach taken to the valuation of real estate assets owned by open- ended funds, legislators have not included this specific reference in PEA; rather, they opted for mirroring the regime of section 19 of the AIFMD; ie, laying down general principles and objectives. The main principle under PEA in relation to asset valuation is to ensure that “appropriate and consistent procedures are established so that a proper and independent valuation of the assets of the AIF can be performed”. In order to achieve this, PEA establishes that “the rules applicable to the valuation of assets and the calculation of the net asset value per unit or share of the AIF shall be those enclosed in the internal rules or by-laws [as the case may be] of the AIF, in accordance with the criteria set out by the CNMV”. As with the regime governing open-ended funds under CISA, both the value of the assets and the NAV of the AIF must be calculated at least once a year. Due to their less liquid nature, valuation must also take place whenever there is an increase or a decrease of the capital of the AIF. PEA generally reflects the provisions of the AIFMD regarding the performance of valuation. Finally, it should be noted that any potential liability in connection with an improper valuation in respect of a real estate AIF and the unit holders in the real estate fund will lie with the AIFM. Remuneration Is promote/carried interest In relation to the design and implementation of remuneration policies for AIFMs, both CISA and typically or specifically picked up PEA set out a number of principles with which remuneration policies must comply. However, no in the variable part or is it treated specific rules on carried interest have been provided. It remains to be seen whether such rules will be otherwise? provided in the future. Depositary Has your country implemented No, the legislative provision enabling such entities to perform such functions has not yet been the option to permit non-banking implemented. institutions to perform the depositary functions in respect of real asset AIFs? Marketing Did your country uphold its private Open-ended AIFs: placement regime in respect of EU Since 2003, the marketing of units or shares in open-ended AIFs has been subject to the domestic AIFs managed by sub-threshold EU prior authorization procedure set out in CISA. AIFMs and non-EU AIFMs; as well The amendments to CISA have only resulted in the granting of a free marketing regime for EU as non-EU AIFs? AIFs managed by EU AIFMs thus generally upholding the prior authorization-based procedure for the marketing in Spain of any other open-end AIFs. Furthermore, CISA provides that section 30bis of the Spanish Securities Market Act does not apply to the offering of shares or units of open-ended AIFs managed by AIFMs, thus preventing any private placement of any open-ended AIFs by AIFMs. Close-ended AIFs: Similarly, PEA sets out a marketing regime requiring all AIFMs managing close-ended AIFs seeking to market those AIFs in Spain—except for close-ended EU-AIFs managed by EU AIFMs—to obtain domestic prior authorization from the CNMV. Due to the priority of PEA over the Spanish Securities Market Act, it appears that the prior private placement regime available under the Spanish Securities Market Act is no longer available.
16 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | international
uk
CONTACTS
assisted by Jaime Denis del Campo Michael McKee Gavin Punia Philip McEachen ([email protected]) ([email protected]) ([email protected]) ([email protected])
General Questions topic Scope Has the AIFMD been The AIFMD was implemented in the UK by the Alternative Investment Fund Managers Regulations 2013 implemented in your which entered into force on 22 July 2013. Amendments were also made to the FCA Handbook, the country? If so, when? principal rulebook of the UK Financial Conduct Authority (FCA), and key pieces of existing financial services legislation including the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
Is there a distinction There is no specific carve-out from or distinction made in the AIFMD in the UK for REITs, REIFs or similar between or carve-out structures. The FCA has indicated in published guidance that a REIT is a concept used for tax purposes from the AIFMD for REITs, and that there is no presumption either way as to whether or not a REIT is captured by the AIFMD in the real estate investment UK. Regard must be had to the operations, commercial purpose and circumstances of a REIT (or similar funds (REIFs), real estate structure) to establish if it has a commercial or industrial purpose as a continuing company. holding companies or similar structures in your country?
Valuation How have the valuation FUND 3.9 in the FCA Handbook implements the valuation requirements for AIFMs. There are no specific rules and standards been requirements for alternative real estate funds. The AIFM must ensure any valuation of the AIF’s assets is implemented in respect performed impartially with all due skill, care and diligence. Procedures must also be put in place to allow for of alternative real estate proper and independent valuation of the AIF’s assets and for disclosure of a publication to investors of the funds? NAV per unit or share of the AIF. The AIFM must ensure that the assets of any AIF it manages are valued at least once a year. In an open- ended AIF, valuations should be carried out at a frequency appropriate to the assets held by the AIF and the frequency of redemption of shares or units in the AIF. The AIFM may perform this function itself provided that the valuation function is independent from portfolio management and that the AIF’s remuneration policy ensures conflicts of interests are mitigated and undue influence on employees prevented. The AIFM may appoint an external valuer. The external valuer must be independent of the AIF, the AIFM and any person with close links to the AIF or AIFMD. The AIFM must also be able to demonstrate that the external valuer holds professional registration, is competent, and that the appointment complies with the requirements of the AIFMD.
Remuneration Is promote/carried “Remuneration” for the purposes of the AIFMD has been interpreted widely in the UK to include any interest typically or carried interest paid by an AIF. The remuneration rules from the AIFMD as implemented in the UK in specifically picked up in the “AIFM Code” in the FCA Handbook need not be applied to all carried interest provided that the the variable part or is it structure in question satisfies “objectives of alignment of interest with investors and avoids incentives treated otherwise? for inappropriate risk taking”. This guidance from the FCA will apply in addition to the similar but much narrower criteria published by ESMA in its guidance for disapplying the remuneration requirements.
Depositary Has your country Yes. An AIFM, for each UK AIF that it manages, must ensure the appointment of a depositary, that is a firm implemented the option established in the UK and which is one of the following: to permit non-banking • A credit institution, that is, a bank; or institutions to perform • An investment firm within the meaning of the Markets in Financial Instruments Directive with the the depositary functions necessary regulatory capital and permissions/authorizations to safeguard and administer assets; or in respect of real asset • Certain other categories of institution subject to prudential regulation and ongoing supervision such as AIFs? the trustee of a unit trust scheme or depositary of an investment company with variable capital. Marketing Did your country uphold The private placement regime in the UK was upheld following the implementation of the AIFMD. its private placement The UK implementation draws a distinction between “above threshold” or “full scope” AIFMs and “sub- regime in respect of EU threshold” or “small” AIFMs, being AIFMs with assets under management of less than EUR 500 million for AIFs managed by sub- unleveraged funds and EUR 100 million for leveraged funds. A small AIFM may market an EU AIF or non-EU threshold EU AIFMs and AIF in the UK by notifying the FCA and submitting certain limited information to the FCA in respect of the non-EU AIFMs; as well as AIF. A full scope non-EU AIFM, in order to market an EU AIF or non-EU AIF in the UK, must comply with the non-EU AIFs? AIFMD’s requirements in respect of providing an annual report to investors, disclosing certain information to investors before they invest and complying with the requirements of the AIFMD in respect of asset stripping and controlling interests of non-listed companies.
ISSUE 19 • 2015 | 17 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | asia
UNDERSTANDING FOUR KEY CHANGES TO THE HONG KONG REIT CODE LUKE GANNON AND CHRISTOPHER KNIGHT, HONG KONG
ollowing completion of an process, and to assess how these changes REIT Code can be seen as an effort industry consultation process may impact both existing REIT managers to broaden the investment landscape which was held during the first and new applicants to the Hong Kong available to a Hong Kong REIT, in order to quarter of 2014, the Hong REIT market. bring the Hong Kong regulatory regime FKong Securities and Futures Commission more in line with other established REIT (the Commission) formally updated Background regimes (in particular, that of Singapore), the Code on Real Estate Investment The Commission’s stated aim was and to stimulate interest in the Hong Trusts (REIT Code) in August 2014 to to introduce greater flexibility to the Kong REIT market (to date there are reflect the conclusions drawn from the existing REIT regulatory regime in only 11 authorized Hong Kong REITs). consultation process. The Commission Hong Kong. The consultation specifically has now issued an updated set of addressed proposals to allow Hong Kong Key changes “frequently asked questions” (FAQs) to REITs to invest in: (i) properties under The main changes to the REIT Code are the REIT Code, in order to provide development (and to undertake property as follows: further guidance on the Commission’s development activities); and (ii) financial 1. Relaxation of the requirement that a interpretation of certain key sections. instruments (including listed/ unlisted Hong Kong REIT may only invest in pre- The purpose of this article is to securities and domestic and overseas existing income-generating real estate summarize the four main changes to the property investment funds). assets (Chapter 7.1) REIT Code arising from the consultation This re-evaluation of the Hong Kong A Hong Kong REIT may now
18 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | asia
acquire uncompleted units in a instruments (relevant investments), Updated REIT Code FAQS building which is unoccupied and being: (i) domestic and international The updated REIT Code FAQS issued non-income producing, or in the listed securities; (ii) unlisted debt in August 2014 amended the responses course of substantial development, securities; (iii) government and other for FAQS 6, 11 and 19. In addition, new redevelopment or refurbishment public securities; and (iv) domestic FAQS 39–50 were added, providing (uncompleted units). This provides a or international property funds. clarification on the changes to the REIT REIT manager with greater flexibility This change radically broadens Code. The following clarifications are of to consider alternative investment the investment landscape for REIT particular note: opportunities as part of a REIT’s managers, who were previously 1. FAQ40—In determining whether an general portfolio of investments. restricted to investing only in physical acquisition of vacant land is an integral However, the Commission has sought real estate assets. The change also part of a property development to maintain a level of certainty and brings the Hong Kong regime in project, the Commission will generally stability for Hong Kong REITs, by line with the Singapore regulatory consider factors such as: (i) whether imposing a requirement that at regime, which already permits such the land can be readily used for least 75 per cent of the gross asset investments. A Hong Kong REIT the property development project value of a REIT must at all times be manager may now hold part of its to be undertaken; and (ii) whether invested in real estate generating investment portfolio in such relevant additional approvals (zoning, planning, recurrent rental income. instruments, allowing for a more government lease conditions, etc.) 2. Relaxation of prohibition on undertaking diverse asset pool. have to be obtained from relevant property development (Chapter 7.2) Investment in relevant instruments is authorities for commencing the A Hong Kong REIT may now engage subject to the following restrictions: property development project. in “property development and (i) the value of a REIT’s holding of 2. FAQ45—A REIT manager must related activities”, defined under the relevant investments issued by any ensure that all relevant investments REIT Code as “the acquisition of single group of companies may not acquired by a REIT are independently uncompleted units in a building by the exceed 5 per cent of the gross asset and fairly valued on a regular basis in scheme and property developments value of the REIT; (ii) a relevant accordance with the REIT’s constitutive (including both new development investment should be sufficiently liquid, documents, and in consultation with projects and the re-development able to be readily acquired/disposed of the REIT’s trustee. FAQ45 notes that of existing properties)” (property under normal market conditions and the valuation of relevant investments development). Property development should be made in accordance with is permitted as part of the investment in the absence of trading restrictions, and have transparent pricing; and (iii) requisite accounting standards as well strategy of a Hong Kong REIT, subject as best industry standards and practice. to the requirement that aggregate at least 75 per cent of the gross asset value of the REIT must be invested in Both REIT managers and REIT trustees investments by that REIT in all will need to carefully consider the real estate that generates recurrent property development costs together process by which such “new” assets rental income at all times. Again, this with the aggregate contract value are valued, both on an initial and on an can be seen as an effort to maintain of any uncompleted units, do not ongoing basis. exceed 10 per cent of the gross asset a fundamental level of stability and 3. FAQ49—Before an existing Hong value of the REIT. For this purpose, certainty within Hong Kong REITs, by Kong authorized REIT engages in refurbishment, retrofitting and limiting exposure to large or illiquid “property development and related renovations are excluded from the positions, and ensuring that the activities”, a REIT manager should first definition of property development. pre-existing income-generating real amend the existing investment scope, Together with amendment (1) estate assets remain as the core of a as set out in the REIT’s constitutive (above), this change is designed to REIT’s investment portfolio. Further, documents (that is, the trust deed). encourage those REIT managers with guidance on the REIT Code prohibits The Commission takes the view an opportunistic investment approach. investment in high risk, speculative that engaging in such activity would and/or complex financial instruments 3. Relaxation of prohibition on investing in amount to a change in the investment and products, and expressly prohibits vacant land (Chapter 7.2) objective/policy of an existing REIT, and securities lending, repurchase A Hong Kong REIT may now invest in as such, the approval of unit holders by transactions and OTC transactions. vacant land where the REIT manager way of a special resolution under the is able to demonstrate that such an Existing and prospective REIT managers REIT Code would be required. investment is an integral part of the should be aware that all of the above property development activities of relaxations to the existing regime are Conclusion a REIT (see above) and within the subject to a number of restrictions, The amendments to the REIT Code REIT’s investment objective. See primarily the percentage that such represent an exciting opportunity for the FAQ 40 (below) for a description of investments may constitute as part of Hong Kong REIT market, both for existing investments that are considered to be the overall portfolio of assets held by a REIT managers considering investment an integral part of a REIT’s property REIT. It is expected that the Commission opportunities, and for new entrants development activities. will require a clear demonstration evaluating different jurisdictions. It is 4. Permitting investment in property-related from REITs that these restrictions hoped that the relaxation of the previous instruments can be met and a REIT considering restrictions will ensure that Hong Kong Chapter 7.2B of the REIT Code now investing in relevant instruments, for is considered as an attractive domicile provides that a Hong Kong REIT example, should be able to explain to choice for futures REITs, in particular, may invest in a restricted number the Commission the nature of such in terms of an attractive exit option for of permitted property-related investments, and the associated risks. regional private equity investments.
ISSUE 19 • 2015 | 19 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | belgium
UNCERTAINTY IN BELGIUM’S PRE-MARKETING RULES UNDER THE AIFMD KOEN VANDERHEYDEN, AXELLE VAN DEN BROECK AND MATTHIAS PURNAL, BRUSSELS
efore the incorporation of the determine the exact point when pre- concerns. Moreover, the FSMA is of Alternative Investment Fund marketing activities become marketing the opinion that the prospective fund Managers Directive (AIFMD) activities which trigger the restrictions does not need to be notified under into Belgian law, the marketing and requirements of the AIFM Law. It is the AIFM Law as long as the fund has ofB units in alternative investment funds essential that the AIF manager (AIFM), not yet been legally set up, provided all (AIFs) in Belgium was not regulated, unless or the persons acting on that manager’s documents are clearly marked as draft it was considered to be a public offer. behalf, are able to determine the exact and all communications are structured in The Belgian Law of 19 April 2014 relating moment when their market research and such a manner to suggest that it is not a to alternative undertakings for collective approach to potential investors qualify as formal offer nor solicitation and provided investment and their managers (AIFM an offering or placement subject to the that it is not yet possible for investors to Law) lays down more stringent rules on rules on marketing in the AIFM Law. subscribe. This means that pre-marketing marketing. Now the Financial Services and Although some EU member states communication drafted by the manager Markets Authority (FSMA) regulates and have taken a broader stance and go to gauge the interest of the market supervises the marketing of AIF units in beyond the concept of marketing in the and potential investors without any Belgium, even if that marketing is addressed AIFMD by determining that “marketing” completed documents, such as a draft exclusively to professional investors. covers any form of advertising and private placement memorandum (PPM) For the purposes of the directive, sales promotion, the general approach or teaser documents, should not fall “marketing” means “a direct or indirect taken by most EU countries is that pre- within the definition of marketing of AIFs. offering or placement at the initiative marketing activities do not trigger any Another approach is the “reverse of the AIFM or on behalf of the AIFM AIFMD requirements. solicitation”. This is where the investor of units or shares of an AIF it manages In Belgium, the general view is that there approaches the manager of the AIF on to or with investors domiciled or can only be an offering or placement in his own initiative meaning that there is no with a registered office in the Union”. the sense used by the AIFM Law from the overt marketing approach from the AIFM. Belgium retains this wording in its AIFM moment that the AIFM, or persons acting Based on the above definition of marketing Law. Marketing is a key concept within on his behalf, contact potential investors in the AIFMD, reverse solicitation would not the AIFMD’s legal framework, as only and invite them to buy or subscribe for be captured by the marketing requirements “marketing” as defined in the directive shares or units of the AIF on the basis of of the directive. The difficulty resides is regulated. Operations that do not fall final and comprehensive documents. in what constitutes reverse solicitation within that definition are not subject to Such an approach is consistent with and the interpretation by each national the AIF regime. other Belgian legislation (for example, regulator. Some industry stakeholders The use of “a direct or indirect offering provisions governing the prospectus see reverse solicitation as something of a or placement” is one of the key elements and the Undertakings for Collective slippery slope, because of the difficulty in to consider when assessing whether Investment in Transferable Securities drawing the line between what is passive certain activities constitute marketing. (UCITS) legislation) and makes it and what is active marketing. However, as the placing on the market possible for AIFMs, or persons acting Distinguishing between “pre-marketing” of AIFs is a complex process which takes on their behalf, to assess local investors’ and “marketing” is not always simple some time, it is not straightforward to appetite prior to addressing all AIF and varies from one country to another.
20 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | belgium
“The concept of pre-marketing remains a nebulous one. ”
Unlike some other countries in the approached by an AIFM with final and taken by different EU member states. This EU, Belgium seems to have taken the complete offering documents and creates difficulties for AIFMs planning their approach that pre-marketing activities whether it is possible for such investors distribution strategy, as the same activity generally do not trigger AIFMD to subscribe for shares or units of the could lead to different interpretations requirements. An important criterion fund on the basis of those documents. in the various EU member states. It is to determine the point where pre- Nevertheless, the concept of pre- therefore recommended that legal advice marketing crosses the line into the marketing remains a nebulous one be taken at a very early stage in the territory of regulated marketing is especially since a lack of EU-wide guidance AIF launch process in all cases where whether the potential investors are has resulted in different approaches being marketing is intended.
ISSUE 19 • 2015 | 21 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | france
FRENCH OPPCI VEHICLES : MORE FLEXIBLE AND STILL TAX EFFICIENT JULIA GASPARD AND MYRIAM MEJDOUBI, PARIS
irective 2011/61/EU on of EUR 100,000. These represent Alternative Investment approximately 90 per cent of OPCIs. Fund Managers (AIFMD) The purpose of OPCIs is investment was incorporated into in real estate assets that they lease, or FrenchD law by Order 2013-676 that they build for the purpose of leasing, published in the Official Journal on 27 and that they hold either directly or July 2013. The directive simplified the indirectly, including those that have yet legal framework for asset management to be completed, all operations required and collective investments funds, while for their use or resale, the carrying out enhancing professional and other investor of all types of works to these real estate protection and it is having a significant assets, and, secondarily, the management impact on the alternative investment of financial instruments and deposits. fund industry in Europe and beyond. The implementation of the AIFMD in A number of competitiveness France enables OPCIs to hold real estate measures have been taken to make rights directly through financial leases French collective investment products (known as “credit–bail immobiliers”) which more attractive, particularly real estate was previously only possible through a collective investment schemes (OPCIs) corporate intermediary. of which, according to a study published The real estate assets of an OPCI by the Financial Markets Authority (AMF) (which must constitute at least 60 per on 9 January 2015, there were more cent of its overall assets) mainly consist than 184 (at the end of 2013) operating of real estate assets built or acquired in with gross assets under management of order to be rented, finance lease rights EUR30.6 billion. Most of those pursue an over such properties, shares in certain investment policy focused on a specific non-listed real estate companies, shares real estate asset category, mainly office in listed real estate companies and shares premises (more than 50 per cent of real in French or foreign OPCIs. estate assets) or retail premises (more than 20 per cent of real estate assets). The AMF issues an authorization to OPCIs are collective investment bodies OPCIs and OPPCIs after checking the whose securities are not listed on the information supplied in the regulatory stock exchange and whose purpose is documents (undertaking rules or articles investment in real estate. The setting- of association and/or prospectus, where up of an OPCI is subject to prior applicable) and in advertising documents. agreement from the AMF, the OPCI The AMF also monitors these funds being represented by a French portfolio throughout their lifetime. management company (société de OPPCIs are required to hold: gestion) also approved by the AMF. • real estate assets, accounting for at Since the implementation of the AIFMD least 60 per cent of their portfolio in France, OPCIs are divided into two (with some differences in portfolio main groups: those that are open to composition for SPPICAVs (open-end general public investors with no minimum real estate investment companies, subscription amount (known as “Grand known as “sociétés de placement à Public”) and OPCIs open to professional prépondérance immobilière à capital investors (known as “Organisme variable”) and FPIs (unincorporated Professionnel de Placement Immobilier”, real estate investment funds, known as or OPPCI) with a minimum subscription “fonds de placement immobilier”);
22 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | france
“These real estate investment schemes are hugely tax-efficient. ”
• a cash reserve, accounting for at least are exempt from paying corporate 5 per cent of their portfolio; and tax provided that they meet certain • the rest of the portfolio, which should requirements and particularly if they be made up of financial assets (for comply with distribution obligations. In example, securities). order to qualify for the corporate tax exemption, the SPPICAV is required to This structure has the inherent distribute within five months following characteristics of collective investment the end of a fiscal year, at least (i) 85 schemes enabling investors to enjoy per cent of the profits of the previous greater liquidity, since the minimum real year; (ii) 50 per cent of the capital gain estate investment ratio is much lower than made from the sale of real estate assets for an SCPI (société civile de placement during the financial year or the previous immobilier) and fosters more dynamic financial year; and (iii) 100 per cent of financial management of the portfolio. the net income of the previous financial OPPCIs which take the form of year derived from distributions from an open-end real estate investment companies held by the SPPICAV which company are the most commonly used benefit from a corporate tax exemption and can be set up as a French société on their real estate activity. anonyme with at least seven shareholders Shareholders are taxed on the société par actions or as a French distributions received from the SPPICAV simplifiée with at least one shareholder or gains on their shares. The level of as long as the bylaws do not prohibit the taxation liability varies, depending on plurality of shareholders. The possibility whether the shareholder is an individual société par actions of using the form of a or a company and whether the simplifiée makes the use of OPCIs more shareholder is considered to be a French flexible as it makes it possible to have resident for tax purposes. only one shareholder and to avoid the However, the tax efficiency of a complex scheme used in the past with French OPCI involving Luxembourg multiple shareholders. shareholders will be adversely affected Among the mandatory advisers, an by an amendment to the France– independent real estate valuer must Luxembourg treaty adopted on 5 be appointed who will provide an September 2014. As from the ratification annual valuation of the real estate of this amendment, capital gains made assets owned by the OPPCI. Following by a Luxembourg company on the sale the incorporation of the AIFMD, only of shares of a company or OPCI holding, one real estate valuer is mandatory for directly or indirectly, mainly real estate OPPCIs (instead of two previously). In in France, will no longer be liable to tax addition, a custodian (dépositaire) must in Luxembourg (where they could, in be appointed, either a credit institution certain circumstances, be completely or an investment firm, which will monitor exempt from tax), but will instead be the management of the OPPCI as well liable to taxation in France. However, it as keeping the securities of the financial should be noted that this amendment assets. Finally, a statutory auditor must be takes effect as from the calendar year appointed to certify the annual accounts following its ratification. This means that of the SPPICAV and to attest to the all transactions completed during 2015 accuracy of the information provided. will still benefit from the current tax These real estate investment schemes savings on capital gains related to the are hugely tax-efficient since SPPICAVs France–Luxembourg treaty.
ISSUE 19 • 2015 | 23 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | italy
SICAFS INTRODUCED IN ITALY AS REGULATED INVESTMENT VEHICLES AGOSTINO PAPA, ROME
ntroduction Key characteristics of Italian provided they are unleveraged As part of the implementation real estate SICAFs and that the investors’ right of of the Directive 2011/61/EU The establishment of a SICAF must be redemption may not be exercised on alternative investment fund authorized by the Bank of Italy. for a period of at least five years Imanagers (AIFMD), a new regulated A SICAF whose shares can only be from the date of initial investment. investment vehicle, called “società di offered to professional investors and Reserved SICAFs below threshold are investimento a capitale fisso”, or SICAF, qualified investors (including, among subject to slightly less onerous regulatory has been introduced in Italy. others, stockbrokers and foreign persons requirements than those which apply to Under the AIFMD and Legislative authorized under their home state SICAFs above threshold. Decree 58/1998 (known as the Unified regulations) is classed as “reserved”, as Financial Act, or UFA), a SICAF is a opposed to the “retail” SICAF, whose The authorization procedure close-ended alternative investment fund, shares can be offered to any investor and SICAFs are authorized by the Bank that is, it is a scheme established as joint may also be listed on a regulated market. of Italy, in consultation with Consob. The authorization procedure must stock company with fixed capital and The SICAF can manage its assets itself, generally be completed within 90 days, a registered office in Italy, having as its or appoint an external manager. Other though the period may be suspended sole commercial purpose the investment entities involved in a SICAF’s operations include, among others, a custodian where additional documentation is of assets obtained through the issue of bank, which is required to hold cash requested. The following conditions for shares (or other equity instruments), and the financial assets of the SICAF, in authorization must be met: among a number of investors, managed order to safeguard the investors’ rights (i) the entity must be a joint stock as a whole in the interest of its investors and property, an auditor to certify its company; and independently from them. It invests accounts and any independent experts (ii) it must have a minimum initial share mainly in real estate on the basis of a who may be appointed to provide capital of at least EUR 1 million pre-determined investment policy. valuations of real estate. (EUR 500,000 for reserved SICAFs, This article provides a brief outline of and EUR 50,000 for SICAFs below the key characteristics of the SICAF, with SICAFs above and below threshold); a focus on those that invest mainly in real threshold estate, and their marketing procedures. It SICAFs may be described as either above (iii) its registered office and the head should be noted that the law in this area threshold or below threshold. office must be in Italy; is currently in flux due to the ongoing Under the UFA, SICAFs below threshold (iv) its sole commercial purpose must be implementation of the AIFMD, and new are those reserved SICAFs: the collective investment of assets regulation is expected shortly. Thus, the (i) whose assets under management do obtained through the offering of its following is an overview of the Italian not exceed EUR 100 million; or shares and other equity instruments; laws and regulations that are expected to (ii) whose assets under management (v) its founding shareholders and the come into force in the next few months. do not exceed EUR 500 million, management team must meet the
24 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | italy
integrity requirements established (iii) they can invest in receivables relating the Regulation, this requirement is met by the Ministry of Finance, in to their own assets, meaning that even where only one unitholder exists, consultation with the Bank of Italy they can lend money to third parties. provided that its investment is in the and Consob. (iv) They cannot carry out any direct interest of a plurality of investors (for The application for authorization must building activity. example, in the case of a fund of funds), include details of the SICAF’s proposed or that the marketing of the shares in activities, its plans for development, its Risk concentration limits the SICAF was directed to a potential objectives and a report outlining its and leverage plurality of investors. administrative structure. Under the Bank of Italy’s new Where a reserved SICAF wishes to Reserved SICAFs are subject to a less draft Regulation on collective asset market its shares, notification must be onerous evaluation procedure than that management, SICAFs must comply sent by the intermediary to Consob, which applies to retail SICAFs. Once with certain risk concentration limits. including a covering letter, outlining the authorization is given, the SICAF must Reserved SICAFs may derogate from SICAF’s activities; a copy of its by-laws; de commence its activities within one year. these limits, but even in these cases, a and other information, including a facto minimum level of diversification of description of how the SICAF intends Investment activity risk (based on the characteristics of the to avoid marketing its shares to retail SICAFs must be managed in accordance portfolio assets) must be ensured. investors. Marketing may only commence with a predetermined investment policy In terms of leverage, the Regulation on receipt of Consob’s approval (to be and, when they invest mainly in real provides that retail SICAFs must limit issued within 20 business days). estate, must typically comply with the leverage to a ratio between total Similar restrictions apply to the following investment limits: indebtedness and NAV not exceeding marketing of a retail SICAF’s shares. They (i) they must invest an amount equal at two, while no specific limit to the use must also notify Consob and provide least to 2/3 of their total value (which of leverage is provided for reserved information on their activities. Again, may, in certain circumstances be SICAFs. However, if the reserved SICAF marketing may only commence on reduced to 51%) in real estate, rights consistently uses leverage (that is, the receipt of Consob’s communication (to in rem on real estate assets, equity ratio between total indebtedness and be issued within 10 business days—the interests in real estate companies NAV is higher than three), the Bank of and other real estate AIFs (these are Italy will step in to evaluate the adequacy shorter term reflects the less onerous known as “qualifying assets”). of the SICAF’s internal structure and risk authorization procedure). (ii) they may invest the remaining 1/3 of management, and the potential impact of Retail SICAFs wishing to trade their their total value in assets other than leverage on its financial stability. shares on a regulated market must qualifying assets (for example, listed issue a prospectus. This is also subject to or unlisted financial instruments, in Shares in a SICAF Consob’s approval. Admission to trading compliance with the relevant general Share purchase in a SICAF is subject to is subject to authorization by the Italian prohibitions and investment limits oversight by the Bank of Italy. There must Stock Exchange (Borsa Italiana) and is provided by law). be a plurality of investors but, under regulated by the Exchange.
ISSUE 19 • 2015 | 25 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | middle east
EXPLORING FOREIGN INDIRECT INVESTMENT IN DUBAI’S REAL ESTATE MARKET HELEN HANGARI, GHASSAN SHUHAIBAR AND JAMES CARTER, DUBAI
ubai is known internationally United Arab Emirates (UAE). By trading be held by the public for family businesses for its dynamic real estate in GDRs, the ownership of the shares seeking to list on the DFM was reduced market and has attracted can remain with a bank which satisfies to 30 per cent, thereby allowing the vast numbers of direct the nationality requirements of land families to retain up to 70 per cent of the investorsD since “freehold” ownership for ownership in Dubai but the GDRs can shares in the company. It is thought that non-nationals in designated areas was still be traded by non-GCC nationals. this change will encourage many family announced in 2002 and the supporting GDRs often appeal to companies in the businesses to seek to raise funds via an law was published in 2006. Middle East and other emerging markets initial public offering (IPO). The regulations Over the course of the last 18 months, as they enable issuers to offer securities governing the DFM also prevent the there has been an increasing trend for in a sophisticated and developed market, founder of a company from personally large real estate companies in Dubai such as London, thereby allowing them making a cash return from a listing for a to seek a public listing in order to raise access to a broad range of international minimum of two years, which may also funds or realize value in a family owned investors that they would otherwise not make an overseas listing more appealing. business. Such public listing has tended be able to reach. A listing of GDRs on A listing on the LSE also means to either be on the London Stock the LSE requires adherence to a lower that investors are not investing in an Exchange (LSE) or the Dubai Financial standard of corporate governance and “emerging market”, as is the case with Market (DFM) and enables international disclosure requirements than a premium shares listed on the DFM, thereby investors to indirectly invest into some listing of equity shares would. Another avoiding any negative connotations of the leading real estate classes in Dubai key advantage of listing GDRs on the and financial risk that is associated with including residential schemes, leisure LSE is that issuers do not need to have investing in such a “secondary” market. assets, hotels and malls. their equity securities listed (following the deletion of LR18.2.10R in 2011) thereby Listing on the DFM Listing on the LSE avoiding the risk, cost and lengthy time Despite the appealing aspects of a listing A high profile example of a Dubai real implications that are associated with a full on the LSE, the DFM is still an attractive estate company raising money via the blown equity/securities issuance process. option for local companies. In December LSE is Damac Properties which began Companies in the UAE are attracted 2014, Damac offered the holders of its trading global depository receipts (GDR) to a listing on the LSE (as against a listing GDRs the option to convert these GDRs on the LSE in December 2013. GDRs on the DFM) for many reasons including into shares in a Damac company which are a negotiable instrument issued the added prestige, access to a greater listed on the DFM. The GDR holders by a depository bank that evidences number of investors and the ability to were offered 23 shares for each GDR ownership of shares in a foreign company. benefit from being able to list a lower that they held. Approximately 97 per cent The trading of GDRs does not constitute proportion of its shares than would be of the GDRs were converted into shares a trading of the underlying shares which required under the DFM regulations. of the DFM Damac listed entity. remain in the custody of the depository Listing on the LSE only requires 25 per Another recent example of a high profile bank. In the case of Damac Properties, cent of the shares to be held by the listing on the DFM is Meraas Holding’s each GDR constitutes three ordinary public and the Alternative Investment theme park division, Dubai Parks and shares in the company. GDRs are offered Market (or AIM, the junior exchange Resorts. Dubai Parks and Resorts is to institutional investors through a private in London) does not impose any such responsible for developing three theme offering and are subject to the trading minimum requirement. Conversely, for parks in Dubai, namely a Legoland, a and settlement procedures of the LSE. a listing on the DFM (for non-family Hollywood amusement resort and a One of the reasons that Dubai real business companies), the minimum Bollywood movie theme park. In order estate companies may choose to trade required percentage of the issued shares to raise financing for the development GDRs is due to the land ownership to be held by the public is 55 per cent. of these parks, the company listed on rules in Dubai which restrict foreign Such a high proportion of shares being the DFM in December 2014, raising ownership to certain “designated” areas. listed is unattractive to many successful approximately US$680 million. The listing If a plot of land is not in a designated local entrepreneurs/family businesses (or allows international investors to indirectly area, ownership is restricted to nationals government owned companies) who invest in the leisure, travel and tourism of the Gulf Cooperation Council (GCC) wish to retain a majority shareholding of market in Dubai which is aiming to attract or companies wholly owned by them. the company. As a result of this, the DFM 20 million visitors a year by 2020 when The GCC countries are Bahrain, Kuwait, regulations have been changed whereby the Emirate hosts the Expo. Oman, Qatar, Saudi Arabia and the the minimum requirement for shares to In the case of Dubai Parks and Resorts,
26 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | middle east
“Emerging markets are an integral part of a global equity portfolio’s allocation. of the shares that were offered pursuant” has issued should be equal; and (iii) the shopping centres and other retail space to the listing, 60 per cent were offered shareholders’ equity may not be less than in Dubai consisting of approximately 5.9 to institutional investors outside of the paid up capital at the date of the million square feet (as at 30 June 2013). the UAE, 25 per cent were offered to application for listing. Also, the company The DFM benefitted, in June 2013, institutional investors and high net worth applying for the listing should have been from being awarded “emerging market” individuals within the UAE, 10 per cent incorporated for a minimum of two status by the Morgan Stanley Capital for UAE retail investors and, as per the years, with audited financial statements International (MSCI) annual market federal legal requirement (UAE Council issued for each year. An additional benefit classification review. Emerging markets of Minsters’ Resolution No. 8 of 2006), of listing on the DFM is that “public joint are an important and integral part of a 5 per cent was offered to the Emirates stock companies” in Dubai are permitted Investment Authority. to own property throughout Dubai global equity portfolio’s allocation. The MSCI’s emerging market index covers When considering a listing on the DFM, and not only in the areas designated for over 800 securities across 23 markets it is important to note the regulatory foreign ownership. requirements with regards to the listing Another prominent listing which took and represents approximately 11 per entity’s share capital. These regulations place on the DFM in October 2014 was cent of world market cap. The addition state: (i) the paid up capital should of Emaar Malls Group, which listed 70 of the DFM to the emerging market not be less than 35 per cent of the per cent of its shares. This has allowed index increases the attractiveness of the shareholders’ equity or not be less than international investors to indirectly invest DFM to foreign investors, which should AED 25 million (whichever is higher); in the highly popular retail sector in encourage more companies from both (ii) the shareholders’ equity for each Dubai. Emaar Malls Group PJSC owns the UAE and internationally to list their category of shares that the company four significant malls, 30 community securities on it.
ISSUE 19 • 2015 | 27 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | the netherlands THE OBLIGATION OF DEPOSITARIES TO VERIFY OWNERSHIP UNDER THE AIFMD RUTGER ORANJE AND PATRICK KEPPENNE, AMSTERDAM
ntroduction can rely on documents provided by the depositary have responsibilities to ensure Since the global financial crisis in AIFM instead), and if the former, how that the asset verification is performed 2008, many institutions and persons frequently such an independent asset correctly. Indeed, they are, to a certain active in the financial markets have verification should be carried out. extent, dependent on each other. Ibeen subject to an increasing number The absence of any concrete The AIFM must provide the depositary of regulations and directives, including, guidelines on asset verification presents with relevant information on an ongoing of course, the Alternative Investment depositaries with a dilemma. On the basis. The frequency of “ongoing” is not Fund Managers Directive 2011/61/EU one hand a depositary must comply defined in article 90, but it does state that (AIFMD), imposing obligations, rules with its obligations under the AIFMD, the AIFM must ensure that third parties and procedures on not only alternative but on the other hand it is aware that an provide the depositary with certificates investments funds (AIFs) and managers independent asset verification, especially or other documentary evidence (i) every acting on behalf of AIFs (AIFMs), but if it is to be undertaken frequently, time there is a sale or acquisition of also on their depositaries. One of the is a time-consuming and expensive assets and (ii) at least once a year. Thus, obligations of a depositary is to verify activity. This article reviews the relevant at the very least, the AIFM must keep the the ownership of assets of the AIF or the legislation and suggests how depositaries depositary informed of the status of the AIFM and to maintain a record of those may comply with their obligations in this AIF’s assets at least once a year. assets (asset verification). Apart from area. It should be noted that this view The depositary’s obligations are providing an obligation to keep up-to-date may not correspond with the view of specified in more detail, but entail records (article 21(8)), the AIFMD does the European Securities and Markets (briefly) (i) an obligation to hold an up- not stipulate many guidelines on how the Authority (ESMA), who—to the best to-date inventory of the AIF’s assets at obligation to carry out asset verification of the authors’ knowledge— has not all times and (ii) an obligation to possess may be complied with in practice. In 2013, provided any guidelines on these matters. sufficient and reliable information to a Commission-delegated Regulation (EU) carry out an asset verification. No. 231/2013 (the AIFMD Supplement), Two-way street provided some additional guidelines on The most important article on asset Correct procedures in place asset verification by depositaries. However, verification is article 90 of the AIFMD Effectively, these two obligations imply the question remains open as to whether Supplement. From this article, it can that the depositary must at least have the depositary needs to carry out an be seen that the asset verification is a sufficient procedures are in place so independent (own) asset verification (or two-way street: both the AIFM and the that the AIF’s assets cannot be assigned
28 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | the netherlands
or otherwise transferred without the Independent asset • If the AIFM provides the depositary depositary having been informed of verification with comprehensive and up-to-date that. As noted above, this is a two-way It is not clear whether the procedures information at least once a year, and street, as the depositary will (partly) be outlined above include sufficient the depositary has no (reasonable) dependent on the AIFM or a third party safeguards for a depositary to satisfy doubt that the information provided providing the information to him. This the requirements for an “up-to-date by the AIFM is incorrect or means that even though the depositary inventory” and “sufficient and reliable incomplete, then it is considered that has an obligation to keep its inventory information”, or whether an independent the depositary need not carry out an of the AIF’s assets up to date, if the asset verification is required as well. additional asset verification. AIFM does not inform the depositary Article 90 of the AIFMD Supplement (intentionally or unintentionally) of any • If the AIFM provides the depositary clearly formulates the responsibility for sale or acquisition, it may prove difficult with information, and the depositary to rule that the depositary has failed to the depositary as broadly as possible, has (reasonable) doubt that the may keep an up-to-date inventory, provided so that this obligation include an information provided by the AIFM independent the depositary has adequate procedures asset verification as well. is incorrect and/or incomplete, the in place. However, the obligation of the However, if the depositary carries out depositary should notify the AIFM AIFM to ensure that the depositary be this ownership verification itself and of that immediately and ask for the informed at least once a year is clearly compares it to the information it has additional information required to received from the AIFM (and checks for laid down in article 90, meaning the assuage that (reasonable) doubt. Should any discrepancies), it may be concluded depositary is (or at least, should be) the depositary still not be satisfied that the depositary has fully complied aware of this obligation and should make with the information provided by the sure the AIFM complies. Therefore, if the with the obligations under article 90 of AIFM, then it is recommended that inventory of the AIF’s assets turns out the AIFMD Supplement. the depositary carry out an additional to contain out-of-date and/or incorrect independent asset verification. information while no verification has Recommendations been carried out at least once in that Based on the above, the depositary • Irrespective of the above, it is particular year, the depositary could be would be advised to carry out an recommended that the AIFM carries out held responsible for this out-of-date and/ independent asset verification in the an independent (own) asset verification or incorrect information. following circumstances: at least once every three years.
ISSUE 19 • 2015 | 29 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | the netherlands IS THE AIFMD APPLICABLE TO DUTCH REITS? JULIET DE GRAAF AND HENDRIK BENNEBROEK GRAVENHORST, AMSTERDAM
ntroduction Since the first draft of the Alternative Investment Fund Managers Directive (AIFMD) Ithere has been a lack of clarity about the regulatory status of Real Estate Investment Trusts (REITs). Discussions revolve around the question of whether or not the AIFMD applies to REITs. As yet, no common position on a European level (for example, by the European Securities and Markets Authority (ESMA)) has been taken on this. Dutch legislation does not contain provisions which expressly include or exclude the applicability of AIFMD to REITs established in the Netherlands (Dutch REITs, or DREITs), and nor has Following input from the European they do not only act in the interest of the Dutch regulator published a view on Public Real Estate Association (EPRA) to their shareholders but have to take the matter. Consequently, there is some ESMA’s Consultation Paper, “Guidelines into consideration also the interests uncertainty in the Netherlands with on Key Concepts of the AIFMD”, the of other stakeholders such as tenants regard to the regulatory status of DREITs, Association has published its view on the and employees …, are well founded and whether or not they fall within the applicability of the AIFMD to DREITs. arguments that the AIFMD is not scope of the AIFMD. First, the Association clarifies what applicable to them.” This article discusses the current it considers to be a DREIT. According Importantly, none of the six DREITs regulatory status of DREITs under the to the Association, DREITs and similar mentioned earlier have applied for AIFMD, as implemented in Dutch laws property companies are no different authorization under the AIFMD, as and regulations. from ordinary companies. The key implemented in the Netherlands. characteristics of DREITs are: Dutch REITs and their Conclusion 1. they are listed on a stock exchange; regulatory status under the The Association is of the view that there AIFMD 2. there is no obligation to buy back are well-founded arguments that DREITs, Historically the term DREIT referred shares from shareholders (that is, they which exhibit certain characteristics, do to a property vehicle with a special are not “open-end”); not fall within the scope of the AIFMD. “flow-through” tax status. Nowadays, the 3. they implement a corporate strategy, Notably, none of the DREITs which are term is used to describe listed property not a defined investment policy; members of the Association have applied companies more generally, including 4. they are actively involved in the for authorization under the Directive, those that do not have a special tax day-to-day management of property, and thus appear to consider that they are status. DREITs are involved in a range including construction, acquisition, not alternative investment funds under of activities related to the construction, refurbishment, operation and property the AIFMD. Rather, they seem to view refurbishment, investment, operation and management; and themselves as “ordinary companies”, that management of real estate. is, companies with a general commercial 5. they have various stakeholders, such as Companies which (amongst others) purpose within the meaning of ESMA’s shareholders, tenants and employees are considered to be DREITs are Corio guidelines on key concepts of the and not only, or primarily, investors. N.V., Eurocommercial Properties N.V., AIFMD. Further, it appears that the Wereldhave N.V., Unibail Rodamco, Taking the above characteristics of Dutch regulator implicitly (ie it has not NSI N.V. and VastNed Retail N.V. These DREITs into account, the Association expressed a public view) agrees with six companies are members of the concludes: them on this. Association for Dutch Stock Listed “The activities of DREITs, their active It is important to note that whether or REITs (Vereniging ter behartiging van de and day-to-day management of their not a company qualifies as a DREIT and gezamenlijke belangen van beursgenoteerde assets/properties, their governance thus whether or not it is not subject to fiscale vastgoedbeleggingsinstellingen, which structure, the absence of a defined the AIFMD must be carefully assessed on we will call “the Association”). investment policy, and the fact that a case by case basis.
30 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | norway
INTRODUCING FOREIGN REAL ESTATE AIFS IN NORWAY CAMILLA WOLLAN, OSLO
ntroduction their services or market their AIFs in and managing tenancy relationships, all The Alternative Investment Fund other EU member states. This article of which factors tend to suggest that it is Managers Directive (AIFMD) was considers only those AIFMs who are fully not an AIF. implemented in Norwegian legislation authorized under the AIFMD regime. According to the Norwegian Financial by the Alternative Investment Fund Act of Supervisory Authority (FSA), the I Real estate funds governed 20 June 2014 (AIF Act) and regulations of number of Norwegian applications for 26 June 2014 (AIF Regulation). As from by the Norwegian AIF AIF status total about 35, 13 of which 1 January 2015 all market participants regime relate to securities asset management governed by the AIF Act must now comply The administration and ownership undertakings. with the new regime. structure of Norwegian real estate Marketing of real estate The AIFMD regime will impact on companies and funds varies. The country AIFs in Norway the management, administration and has few listed real estate companies. With respect to the marketing of units marketing of alternative investment funds The sector consists mainly of privately (a direct and indirect offering or a (AIFs). These are collective investment owned entities set up as private limited placement) in AIFs (excluding national schemes not subject to the Undertakings liability companies, limited partnerships or funds as defined in the AIF Act), different for Collective Investment in Transferable internal partnerships. The Norwegian state, regulations apply depending on whether Securities (UCITS) regime, typically hedge insurance companies and pension funds are the marketing is to a professional investor funds, private equity and real estate also large-scale direct owners of real estate. (any client meeting two of three criteria: funds. Until now, these funds have been With respect to real estate funds there are a total balance sheet of EUR 20 million; operating in a regulatory void outside approximately 25 to 30 fund providers in turnover of EUR 40 million; or own capital the scope of European regulators, and the Norwegian market, however, some of of EUR 2 million) or a non-professional the AIFMD is the first single market these are currently in the process of closing their real estate funds. investor (any investor not considered as a framework for this sector. The benefit of professional client, though they may apply In terms of Norway’s incorporation the AIFMD for market participants is the to be treated as such). Each of these is of the directive, there are no statutory opportunity it gives them to passport considered in turn below. their services throughout the EU, based exemptions for real estate companies The directive does not regulate the on a single authorization. It also makes it and funds. It is up to each real estate marketing of units in AIFs to non- easier for AIF managers (AIFMs) to market company or fund to assess whether professional investors. Each member state their funds to professional investors in they fall within the scope of the AIF makes its own regulations in this area, and line with the notification procedure (see Act. This assessment should be based under Norwegian law, marketing of units on the entity’s structure, ownership, below) across the EU/EEA. in AIFs to non-professional investors is not business purpose, governance structure Smaller AIFMs whose assets under permitted without FSA authorization. The and corporate documents; the type of management amount to less than EUR regime applicable to marketing activities to 500 million (for unleveraged funds with undertaking is irrelevant. professional clients is less stringent and is long lock-in periods) or EUR 100 million Usually a real estate company has a based on a notification procedure. (for other types of AIFs) are subject to general commercial purpose and strategy a regime tailored specifically to them. (that is, not a defined investment policy) Marketing of real estate They are only required to register with and its management is involved in the EU AIFs to professional the national regulator and to comply day-to-day management through actively investors in Norway with limited reporting obligations. They operated property portfolios, acquiring Marketing of units in real estate AIFs will not, however, be entitled to passport real estate, developing property projects established within the EU to professional
ISSUE 19 • 2015 | 31 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | norway investors in Norway must be notified in AIF is permitted to be marketed to non- Withdrawal of marketing line with the article 32 of AIFMD and professional clients in their home state by permit under the AIF Act, section 6-3. the competent authority. The FSA may revoke an authorization to The AIFM must submit a notification A key investor information document market an AIF, if the requirements set out to the competent authority of its home must be prepared for each AIF. The in the legislation are no longer being met, state. The competent authority has 20 information is to be presented in a or where the conditions of the permit days after receipt of the notification to way that makes it easily understood, are breached. The FSA may, in exceptional inform the FSA if the AIF is intended clear and not misleading, and capable cases, revoke a permit in order to protect to be marketed in Norway. The AIFM of forming the basis of an informed non-professional investors. is allowed to start marketing units in investment decision. The document Norway as soon as it has received must be made available on the AIFM’s Who may distribute units in notification from the home state homepage. Information for non- an AIF? authority that the marketing notification professional investors must be in The units of an AIF can be marketed has been filed. Norwegian, unless the AIF Regulation by a manager with AIFM authorization, The requirements for notification are provides an exemption from this, or a or an asset manager with authorization set out in the regulations laid down by dispensation has been granted. under the Norwegian Securities Fund the home state. Where it is intended to If the AIFM is required to publish a Act, section 2-1. Other regulated entities market to investors in EU member states prospectus according to the Norwegian may also be entitled to market units in other than the home state of the AIF, Securities Trading Act, chapter 7, only an AIF, in cooperation with the manager. the requirements for notification can be information not contained in the The AIF Act does not expressly make any found in Annex IV to the AIFMD. prospectus needs to be disclosed provision as to who can distribute units separately or given as additional in an AIF, other than the AIFM and asset Marketing of real estate EU information in the prospectus. manager, and this must be considered AIFs to non-professional The AIFM must inform the FSA in individually in each case. investors in Norway advance of any material change to In Norway, an AIFM is allowed to market information provided in the marketing Marketing of real estate units of an EU AIF to non-professional application. If the FSA believes that the non-EU AIFs established investors subject to acquiring a marketing change is not in line with the legislation, outside EU/EEA permit from the FSA. then it must inform the AIFM of that, and It is permissible under Norwegian The application for a permit to market it also has the power to stop changes law for managers of non-EU AIFs to an AIF to non-professional investors must being made, or to take other measures to market AIFs to Norwegian professional include the key investor document and stop the marketing of the fund. investors. However, this is conditional on a must describe the AIF’s marketing plans, The FSA may also impose additional marketing permit being issued by the FSA. including measures taken to ensure that requirements on the AIFM when issuing The FSA has entered into Memoranda any marketing undertaken will comply the marketing permit if it considers of Understanding with other foreign with the applicable conduct of business that these are required to safeguard supervisory authorities to facilitate the rules, and include a statement that the Norwegian investors. marketing of non-EU AIFs in Norway.
32 | real estate gazette REAL ESTATE FUNDS AND INVESTMENT VEHICLES | spain SPANISH REITS TAKE OFF MARÍA ALONSO, MADRID
fter a wait of many years, the Spanish REIT regime (known as “Sociedad Anónima Cotizada de AInversión en el Mercado Inmobiliario”, or SOCIMI) was introduced in October 2009. However, the crisis-stricken Spanish real estate market in 2009 onwards, added to the overly restrictive regulation and unattractive tax regime of SOCIMIs (which were subject to a corporate tax rate of 19 per cent) led to the failure of the regime, reflected in the fact that by 2012 not a single SOCIMI had been incorporated. In December 2012, the Spanish government—aware that the initial regime did not meet real estate investors’ expectations—introduced reforms in order to make SOCIMIs more attractive. The main feature of the new regime is that SOCIMIs now qualify for 0 per cent taxation, placing them on a par with the REITs of neighbouring countries in terms of tax liability. The reforms appear to have hit the right note, because under the new by a SOCIMI, meaning that a SOCIMI real estate for leasing purposes, that regime, a number of SOCIMIs have been can be incorporated with only one asset. are subject to a mandatory dividend incorporated. Moreover, the SOCIMI A SOCIMI is therefore a viable option distribution regime similar to the structure has become the preferred to structure major real estate projects SOCIMI regime, which comply with the arrangement for large international having one company and one asset/set of investment requirements referred to investors to invest in Spain in those cases assets per project (for example, shopping above, and that are fully owned by one when divestment is planned only in the malls or hotels) with the objective of or more SOCIMIs or qualifying foreign medium term. better managing risks and liabilities. REITs, may also apply the SOCIMI regime. There is, however, a minimum holding Tax regime Key features of SOCIMIs period required: SOCIMIs’ assets must SOCIMIs are taxed at 0 per cent provided SOCIMIs’ activity be held for a minimum period of three the shareholders owning at least 5 per cent The purpose of SOCIMIs is restricted to years. Non-productive assets must be put of the SOCIMI are taxed on the dividends the ownership of: (i) urban real estate up for lease but, if a tenant can be found received at a minimum nominal rate of acquired for leasing purposes, (ii) plots within one year, that year will count 10 per cent. Where shareholders do not of land acquired for the development towards the minimum holding period. meet this requirement, SOCIMIs are taxed of urban real estate to be leased after Mandatory distribution of dividends at a 19 per cent corporate tax rate on the development is complete and (iii) shares The SOCIMI is required to distribute 80 dividends distributed to those shareholders in other listed SOCIMIs or foreign REITs per cent of profits arising from rental (this 19 per cent is a tax to be paid by the or non-listed Spanish or foreign companies income and ancillary activities, 50 per cent SOCIMI and not a withholding tax on the that could be deemed to be assimilated to of profits from the disposal of qualifying SOCIMIs or Spanish regulated real estate assets or shares and 100 per cent of dividends distributed). collective investment institutions. profits arising from qualifying shares. EU Directives and tax treaties Investment requirements: the 80–80 rule Listing requirements SOCIMIs are eligible for the avoidance of At least 80 per cent of the value of the SOCIMIs must be listed on a regulated double taxation under the EU Directives SOCIMI’s assets must be invested in stock exchange or multilateral trading and tax treaties signed by Spain. qualifying assets or shares and at least 80 facility in Spain, the European Union For more on the origins of SOCIMIs per cent of its income (exclusive of capital or the European Economic Area (for and the reasons for their reform, see gains) must arise from rental income and example, Spain, UK, Ireland, etc.). Orson Alcocer, “SOCIMIs—At Last, REITs from dividends of qualifying shares. Notwithstanding the general rule, in Spain” Real Estate Gazette (Issue 15, There is no requirement regarding a non-listed Spanish companies whose 2014) page 38 (hard copy) or page 70 minimum number of assets to be held main purpose is the acquisition of urban (soft copy).
ISSUE 19 • 2015 | 33 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | usa IRS CLARIFIES REIT DEFINITION OF “REAL PROPERTY” IN PROPOSED REGULATIONS JESSE CRIZ AND BENJAMIN KARR BRIGGS, CHICAGO AND ROBERT LEDUC, MINNEAPOLIS
eal estate investment trusts defines real estate assets as interests in could not have foreseen many of the (REITs) are an integral part real property, interests in mortgages on structures and/or assets that are now of the US commercial real real property, shares in other REITs, and commonplace. Structures such as wireless estate market. Many REITs are certain other short-term investments in towers and wind turbines were not publiclyR traded. In addition, private REITs debt and equity. explicitly contemplated by the current are a commonly employed investment The term “interests in real property” regulatory framework. Prior IRS guidance vehicle in the private real estate market, includes “fee ownership” (that is, outright interpreted the current regulations as particularly when non-US investors or ownership) of, co-ownership of, leasehold indicating that “a structural component tax-exempt investors are involved. interests in, and options to acquire land is not considered real property for this All REITs, both public and private, are or improvements on that land (including purpose unless the interest held therein creatures of the Internal Revenue Code options to acquire a leasehold interest, but is included with an interest held in the of 1986, as amended. As such, REITs are the term does not include mineral, oil, or building or inherently permanent structure subject to an array of tax requirements gas royalty interests. to which the structural component is that are generally beyond the scope of These key REIT definitions under the functionally related”. this article. Code are further interpreted under the This guidance however does not In order to qualify as a REIT and avoid current Treasury regulations, which define resolve whether an improvement on federal (and often state) income taxation the term “real property” as “land or land that is not a building should be at the corporate level, a REIT must meet improvements thereon, such as buildings considered an “inherently permanent a number of technical tax requirements. In or other inherently permanent structures structure” and thus real property, or order to maintain a beneficial status, at the thereon (including items which are whether tangible property that is affixed end of each quarter of the calendar year, structural components of such buildings to a building (or other real estate asset) at least 75 per cent of a REIT’s assets must or structures)”. should be considered “a structural consist of “real estate assets,” certain cash The current regulations further component of such building or structure” items, receivables, and federal government provide that local law definitions and therefore be included with the larger securities. Real estate assets include real are not controlling for the purposes building or structure as real property. property and mortgage loans. In addition, of determining the meaning of real income earned by a REIT from leasing IRS rulings and the Whiteco property as used for the REIT tests real property is generally qualifying gross factors and lay down a list of examples of real income under the REIT income tests. The IRS has issued many private rulings property, including wiring in a building, on the qualification of certain assets as The US Internal Revenue Service (IRS) plumbing systems, central heating or real property. When providing rulings recently issued proposed regulations central air-conditioning machinery, pipes intended to clarify the definition of on this issue, the IRS has generally or ducts, elevators or escalators installed “real property.” These regulations are considered the asset under the in a building, and other items that are expected to reduce the volume of “Whiteco” factors. Whiteco was a case structural components of a building or private letter ruling requests on the topic that examined whether certain property another permanent structure. of what constitutes real property for was either an inherently permanent Finally, the current regulations clarify REIT purposes. Significantly, they do not structure or a tangible personal property that assets “accessory to the operation of purport to change or revoke any prior for purposes of the now-repealed rulings in this area. a business” (even though such items may investment tax credit rules. be termed fixtures forming part of the Whiteco laid down six factors to real estate under local law) are not real Real estate assets consider in making this analysis: A key issue for most companies seeking property, for example, machinery, printing • Is the property capable of being to obtain or maintain REIT status is presses, transportation equipment that is moved, and has it in fact been moved? whether most of their assets constitute not a structural component of a building, real estate assets. Further, this question office equipment, refrigerators, individual • Is the property designed or is likely to be the most critical inquiry a air-conditioning units, grocery counters, constructed to remain permanently non-traditional real estate company will furnishings of a motel, a hotel, or an in place? face in determining whether its assets will office building, etc. • Are there circumstances that tend allow it to obtain REIT status. The Code The drafters of the existing regulations to show the expected or intended
34 | real estate gazette length of affixation, that is, are there cease to be real property when they are circumstances that show that the severed, extracted, or removed from the property may or will have to be moved? land. The storage of severed or extracted • How substantial a job is removal natural products or deposits, in or upon of the property and how time- real property does not cause the stored consuming is it? Is it readily property to be redefined as real property. “removable”? Specifically, under the proposed • How much damage will the property regulations, boat slips and end ties at a sustain upon its removal? marina should generally constitute “land” for REIT purposes. • What is the manner of affixation of Inherently permanent structures the property to the land? Under the new regulations, “inherently The IRS, guided by the current regulations permanent structure” means any and the Whiteco factors, has ruled that permanently affixed building or other data centers, sign superstructures, and structure. Affixation may be to land rooftop sites for wireless towers are all or to another inherently permanent real property. structure and may be by weight alone. If The proposed regulations the affixation is reasonably expected to The proposed regulations were last indefinitely based on all the facts and published on 9 May 2014. They lay down circumstances, the affixation is considered specific types of real property: land permanent. An inherently permanent and improvements to land that include structure must serve a passive function; inherently permanent structures and a distinct asset that serves an active structural components. The regulations function, such as an item of machinery or also classify certain assets that are per equipment, is not a building or another se land, inherently permanent structures, inherently permanent structure. or structural components and, if an Buildings asset does not fall within the specified The current regulations provide that categories, a set of factors with which a building encloses a space within its to consider the asset. Significantly, the walls and is covered by a roof. The proposed regulations indicate that the proposed regulations provide that the analysis as to whether an asset is real term “building” includes the following property applies to “distinct assets,” so the permanently affixed distinct assets: first question is “What is a distinct asset?” apartments, houses, hotels, factory and Distinct assets office buildings, warehouses, barns, In determining whether an asset is a enclosed garages, enclosed transportation distinct asset, the proposed regulations stations and terminals, and stores. provide that the following factors be Other inherently permanent structures taken into account: Other inherently permanent structures • Whether the item is customarily sold are those that would qualify as real or acquired as a single unit rather than estate assets serving a passive function, as a component part of a larger asset such as to contain, support, shelter, cover, • Whether the item can be separated or protect, and do not serve an active from a larger asset and, if so, the cost function, such as to manufacture, create, of doing so produce, convert, or transport. Under the proposed regulations, • Whether the item is commonly other such structures include the viewed as serving a useful function following permanently affixed distinct independent of a larger asset of which assets: microwave transmission, mobile it is a part telephony, broadcast, and electrical • Whether separating the item from a transmission towers; telephone poles; larger asset of which it is a part impairs parking facilities; bridges; tunnels; the functionality of the larger asset roadbeds; rail tracks; transmission lines; Once a distinct asset has been identified, pipelines; fences; in-ground swimming the question is whether it constitutes pools; offshore drilling platforms; storage land or whether it falls under the structures such as silos and oil and gas “improvements to land” rubric, either as storage tanks; stationary wharves and an inherently permanent structure or a docks; and outdoor advertising displays structural component. for which an election has been properly Land made under the relevant legislation. Land includes water and air space Factors in determining whether a distinct immediately above and natural products asset is an inherently permanent structure and deposits that are unsevered from If a distinct asset does not serve an active the land. Natural products and deposits, function and does not fall within the such as crops, water, ores and minerals, specific categories set out above, under
ISSUE 19 • 2015 | 35 REAL ESTATE FUNDS AND INVESTMENT VEHICLES | usa
the proposed regulations, whether any in the inherently permanent structure Intangible assets such structure is an inherently permanent to which the structural component is If an intangible asset, including an intangible structure is based on all the facts and functionally related”. asset established under Generally circumstances, in particular taking the Specifically, the proposed regulations Accepted Accounting Principles as a following factors into account: establish that the following distinct assets result of an acquisition of real property • The manner in which the distinct asset and systems are “structural components”: or an interest in real property, derives its is affixed to real property wiring; plumbing systems; central heating value from real property or an interest • Whether the distinct asset is designed and air-conditioning systems; elevators in real property, is inseparable from that to be removed or to remain in place or escalators; walls; floors; ceilings; real property or interest in real property, indefinitely permanent coverings of walls, floors, and does not produce or contribute to and ceilings; windows; doors; insulation; the production of income other than • The damage that removal of the chimneys; fire suppression systems, such consideration for the use or occupancy distinct asset would cause to the item as sprinkler systems and fire alarms; fire of space, then the intangible asset is real itself or to the real property to which escapes; central refrigeration systems; property or an interest in real property. it is affixed integrated security systems; and humidity The proposed regulations also clarify the • Any circumstances that suggest the control systems. status of licenses and permits—a license, expected period of affixation is not If a distinct asset is not one of those a permit, or another similar right solely indefinite (for example, a lease that listed above, the question as to whether it for the use, enjoyment, or occupation of requires or permits removal of the is a structural component is based on all land or an inherently permanent structure distinct asset upon the expiration of the facts and circumstances, in particular that is in the nature of a leasehold or an the lease) taking the following factors into account: easement generally is an interest in real • The time and expense required to • The manner, time, and expense of property. However, a license or permit to move the distinct asset installing and removing the distinct asset engage in or operate a business generally Note that this analysis largely mirrors the • Whether the distinct asset is designed is not real property or an interest in analysis applied under current law reliant to be moved real property because it produces or on the Whiteco factors. • The damage that removal of the contributes to the production of income Structural components distinct asset would cause to the item other than consideration for the use or A structural component is any distinct itself or to the inherently permanent occupancy of space. asset that is a constituent part of structure to which it is affixed Conclusion and is integrated into an inherently • Whether the distinct asset serves a permanent structure, serves the utility-like function with respect to the The proposed regulations, if adopted, inherently permanent structure in its inherently permanent structure should be welcomed by both existing passive function, and does not produce REITs and companies interested in • Whether the distinct asset serves the electing REIT status as they (1) offer or contribute to the production of such inherently permanent structure in its a clearer framework for determining income, even if capable of producing passive function income other than consideration for the whether an asset will be considered real use or occupancy of space. • Whether the distinct asset produces property for the REIT requirements; (2) income from consideration for the use If interconnected assets work together to essentially formalize existing letter rulings or occupancy of space in or upon the serve an inherently permanent structure and thinking regarding certain permanent inherently permanent structure with a utility-like function (for example, structures, structural components, water systems that provide a building with • Whether the distinct asset is installed and air rights, and intangibles; and (3) electricity, heat, or water), the assets are during construction of the inherently greatly aid in the classification of certain considered together as one distinct asset permanent structure assets as real property, with a certainty that may be a structural component. • Whether the distinct asset will remain not possible under the existing law. Importantly, “structural components if the tenant vacates the premises A version of this article appeared in the are real property only if the interest • Whether the owner of the real Fall 2014 issue of the PREA Quarterly, held therein is included with an property is also the legal owner of the a publication by the Pension Real Estate equivalent interest held by the taxpayer distinct asset Association.
36 | real estate gazette general real estate | australia CHANGES TO FIRB APPROVAL OF FOREIGN INVESTMENT IN AUSTRALIAN REAL ESTATE JANE XU, MELBOURNE
he Federal Treasurer, assisted Australia and other countries, there foreign investors”. As a prescribed foreign by the Foreign Investment have been changes to FIRB’s approval investor, any investment by a Japanese Review Board (FIRB), requirements, ultimately making entity in developed commercial real administers the Foreign Australian real estate more appealing to estate valued below $1,094 million no ATcquisitions and Takeovers Act 1975 investors from our foreign trade partners. longer requires FIRB approval. Previously (Cth), the legislation that regulates foreign the threshold was significantly lower and investment in Australia. FIRB examines Changes introduced by the any Japanese investment in developed applications by foreign investors to Japan–Australia Economic commercial real estate above $248 million Partnership Agreement ensure their proposed investments are required FIRB approval. Commercial real estate in line with government policy. Different Agricultural land The Japan–Australia Economic Partnership rules exist for differing forms of foreign Under the Japanese Partnership Agreement (“Japanese Partnership investment. Irrespective of the value of Agreement, Australia has reserved the Agreement”) commenced on 15 January the land or the nationality of the investor, right to apply a lower threshold to 2015. One of the benefits of the Japanese investment in vacant non-residential land agricultural land, with any investment of Partnership Agreement was that the and most residential real estate must monetary threshold at which FIRB approval over $15 million in agricultural land by have the approval of FIRB, unless the is required for Japanese investment in Japanese investors requiring approval. property falls into an exempt category. commercial real estate in Australia was Residential real estate Following the very recent increased. Now, Japanese investors are All investment in residential real estate commencement of a number of Free given the status currently enjoyed by US will still require FIRB approval (unless Trade Agreements and Economic and New Zealand investors in Australia it is an investment in a new residential Partnership Agreements between and fall within the category of “prescribed dwelling where the developer already
ISSUE 19 • 2015 | 37 general real estate | australia
has approval). However, such approval offerings to potential foreign investors. receive continues. Most commentators is generally granted expediently and Investors from these countries no agree that investors from China will without any conditions. longer have to obtain FIRB approval for receive the same benefits as countries purchases of: who have previously reached Free Trade Changes introduced by • developed commercial real estate Agreements with Australia and also be Australia–Korea Free Trade valued below $1,094 million; granted the higher monetary threshold Agreement • rural/agricultural land valued at less exemption (as detailed above) before On 12 December 2014 the Australia– than $15 million; or FIRB approval is necessary. Korea Free Trade Agreement (“Korean State-owned enterprises Free Trade Agreement”) came into • new dwellings from a developer where the developer already has The Australian government has disclosed force. The Explanatory Memorandum to obtained FIRB approval for the that investments by state-owned Australia’s proposed ratification legislation development. enterprises will continue to require for the Korean Free Trade Agreement approval irrespective of the value, states that raising the monetary threshold It is worth noting that the higher however it was agreed that this would be for Korean investors was aimed at threshold exemptions specified above reviewed at the request of China in three “promoting an increase in the flow of are subject to several limitations. The years’ time. Korean investment into Australia”. exemption from FIRB approval will not apply where the proposed investment is: Agricultural land Commercial real estate • by a foreign government or Within the past few years there has Pursuant to the Korean Free Trade government related entity; been a growing demand in China for Agreement, Korean investors will also top quality Australian produce. This has be subject to the higher monetary • in a sensitive sector (such as media resulted in more and more Chinese thresholds for investments in Australian and telecommunications); or investors opting to purchase agricultural commercial real estate and will only • made by a foreign enterprise of either land in Australia. The latest Agricultural require FIRB approval if they propose of the above countries which does not Land and Water Ownership Survey to purchase a developed commercial satisfy the ownership requirements; or released by the Australian Bureau of property for in excess of $1,094 million. • made by an entity which is not Statistics in June 2014 reports that since Agricultural land incorporated in one of the above the last survey, an additional 4.7 million As with the Japanese Partnership noted countries. hectares of Australian agricultural land Agreement, under the Korean Free The following investments into real estate had been purchased by entities with Trade Agreement Australia has reserved by Japanese and Korean investors will still some level of foreign ownership. In the right of FIRB to review a proposed require approval (however such approval December 2014 it was reported that 50 investment in agricultural land worth $15 is usually quickly granted without the dairy farms across Western Victoria (with million or more. imposition of any conditions): a total net worth of $400 million) were Residential real estate • new dwellings; and purchased by a syndicate that included All investment in residential real estate will • any vacant land for the purpose of a Chinese state-owned enterprise. It has still require FIRB approval (unless it is an constructing a new dwelling. been speculated that, as with the Free investment in a new residential dwelling Trade Agreements reached with other where the developer already has approval). Proposed changes under the countries, Australia will reserve the right Again, this approval is generally granted Australia–China Free Trade to have FIRB assess any investment without any issue and in a timely manner. Agreement proposals by Chinese investors in The precise impact that the Australia– agricultural land valued above $15 million. Summary of changes for China Free Trade Agreement (“Chinese Japanese and Korean Free Trade Agreement”) will have on the Forecast for further growth investment in real estate in rules relating to Chinese investment in in foreign investment in Australia Australian real estate remains to be seen. Australia in 2015 Allowing Japanese and Korean investors Whilst Australia waits for the Chinese A recent report by the investor, Dexus to enjoy more favourable treatment Free Trade Agreement to come into Property Group highlights the increased by reducing regulatory requirements effect, the speculation regarding the interest in Australian property, with increases Australia’s total real estate benefits which Chinese investors will the proportion of foreign investment
38 | real estate gazette general real estate | australia
in commercial property reaching a economy and the potential for high Australia is forecasted to contribute to record high in 2014, comprising 32 per income returns on their investments. In the continuation of this trend. cent of all real estate transactions in residential real estate, figures released Australia. The two largest acquisitions of in late 2014 show that in the nine Indexed Monetary commercial properties in the December months to March 2014, the approval Thresholds quarter were by Chinese investors, of proposed foreign investment was 44 The tables below serve as a useful who purchased office space in central per cent higher than the same period Sydney for $390 million and $425 million in the previous year. The relaxation of summary of the most recently indexed (respectively). Foreign investors are FIRB requirements for foreign investors monetary threshold exemptions for FIRB attracted to Australia’s relatively stable entering into Free Trade Agreements with approval by foreign investors for 2015.
(a) All foreign investors (excluding Chilean, Japanese, Korean, New Zealand and US non-government investors)
All foreign investors (excluding Chilean, Japanese, Korean, New Zealand and US non-government investors) will not require FIRB approval if their investments fall within the monetary threshold limits imposed by the Australian government for that particular type of investment
Type of investment Maximum value of investment before FIRB approval required
Developed non-residential commercial real estate where $5 million the property is heritage listed
Developed non-residential commercial real estate where $55 million the property is not heritage listed
An investment in: • An interest in an Australia business; or If the value of the business or its assets is above $252 million • An interest in an offshore company that holds Australian assets or conducts a business in Australia
(b) Chilean, Japanese, Korean, New Zealand and US non-government investors
Chilean, Japanese, Korean, New Zealand and US non-government investors will not require FIRB approval if their investments fall within the monetary threshold limits imposed by the Australian government for that particular type of investment
Type of investment Maximum value of investment before FIRB approval required
Developed non-residential commercial real estate $1,094 million
Involving “prescribed sensitive sectors”: • An interest in an Australia business; or If the value of the business or its assets is above $252 million • An interest in an offshore company that holds Australian assets or conducts a business in Australia
Not involving “prescribed sensitive sectors”: • An interest in an Australia business; or If the value of the business or its assets is above $1,094 million • An interest in an offshore company that holds Australian assets or conducts a businesses in Australia
ISSUE 19 • 2015 | 39 general real estate | italy LENDING BY INSURERS: NEW ITALIAN LEGISLATION DAVID MARINO, MILAN
n 24 June 2014, Decree down by the Decree and in line with the 2. direct loans to borrowers selected by 91/2014 (known as the regulations issued by IVASS. a bank or a financial intermediary but Competitiveness Decree) On 21 October 2014 IVASS approved where the conditions was published in the Official the amendments to Regulation no. (ii) and (iii) above are not met OGazette. The Decree aims to foster the 36/2011, dealing with investments to cover (admissible within the maximum limit growth of Italian companies through, technical reserves, which provides that of 2.5 per cent of technical reserves amongst other things, facilitating access insurance companies may now provide to be covered); to new sources of financing. The Decree loans to enterprises within certain limits. 3. direct loans to borrowers selected could also have an impact on the real First, the amount of each loan must not by a bank or a financial intermediary estate sector. exceed, as regards the share provided by where the conditions under (i), (ii) In particular, the Decree added the the insurance company: and (iii) are not met (allowed within following provision to paragraph 2 of • 20 per cent of the amount of net the maximum limit of 1 per cent of article 114 of Legislative Decree no. 385 equity shown in the last financial technical reserves to be covered); of 1 September 1993 (the Consolidated statements of the borrowing company; 4. direct loans to borrowers not selected Law on Banking or TUB): • 1 per cent of the technical reserves of by a bank or a financial intermediary “2-bis. Italian insurance companies and the insurance company. (allowed under a specific authorization by IVASS). SACE [an international insurance group Second, four different types of loans are with its headquarters in Rome] shall not envisaged: IVASS can, in fact, authorize the carry out any kind of financing activity 1. direct loans to borrowers selected by a autonomous carrying out of the activity with the public, other than the granting bank or a financial intermediary where entailing the identification of potential of guarantees and only to parties that are all the following conditions are met borrowers of direct loans following not physical persons or microenterprises, (admissible within the maximum limit the evaluation of the plan relating to as defined in art. 2, paragraph 1 of the of 5 per cent of technical reserves to the investment of technical reserves Annex to Recommendation 2003/361/ be covered): approved by the insurer, taking account EC of the European Commission (i) the bank withholds a percentage of (among other things) of: of 6 May 2003, within the limits set at least 50% of the loan and is entitled • the existence of a solvency capital by Legislative Decree no. 209 of 7 to the same rights as those of the requirement in excess of the minimum September 2005 as amended by this Law, insurance company (as regards interest capital requirement; and and related implementation provisions and repayment of the principal); • measurements of capital absorption issued by IVASS [the supervisory (ii) the borrowers have a high degree for direct loans that are the subject of authority for Italian insurers].” of creditworthiness; evaluation to be made with a view to Therefore insurers may now grant (iii) the financial statements of the the future supervisory regime defined loans to companies within the limits laid borrower are audited; by Directive 2009/138/EU (Solvency II).
40 | real estate gazette general real estate | italy TAX BENEFITS RESERVED TO BANKS NOW EXTENDED TO INSURANCE COMPANIES ACTING AS LENDERS CARLOTTA BENIGNI, MILAN
n 24 June 2014, by means is possible to opt for the application The Competitiveness Decree has of Decree 91/2014 (the of a substitute tax levied at the rate of extended the application of the substitute “Competitiveness Decree”), 0.25 per cent of the principal amount tax so that it also applies where loans for the Italian government of the loan. This is an umbrella tax that terms longer than 18 months and one day Ointroduced provisions aimed at offering replaces the ordinary indirect taxation of are advanced by, among others, European incentives for foreign investment in Italy security such as mortgages, pledges or Union insurance companies set up and and increasing Italian businesses’ access assignment of receivables. Such taxation authorized under their national regulations. to credit. The amendments impact two is ordinarily applied at a proportional On this basis, direct lending by investors rate (for example, 2 per cent in the case of the main aspects of financing: indirect can also benefit from the substitute taxation and application of withholding tax of mortgages, 0.5 per cent in the case tax, and thus avoid registration tax, and on interest payments. (See further David of pledges or assignment of receivables), mortgage and cadastral taxes on the Marino, Agostino Papa and Nicoletta thus imposing a significant tax burden security package. Alfano, “Acts to Encourage Competition on the borrower. The substitute tax not in the Provision of Finance” Real Estate only reduces the amount of taxation to This extension, together with the Gazette (Issue 18, 2014) page 14 (hard be paid when financing is initially taken exemption from Italian withholding tax copy) and page 22 (soft copy) for a out, but it also covers any subsequent on interest payments made by Italian general overview of the provisions aimed borrowing and also additional guarantees borrowers to European banks and at opening up the Italian lending market.) forming part of the security package. insurance companies, also provided by Medium- to long-term financing (that is, The main conditions to be met in order the Competitiveness Decree, should loans that mature after a period of more to benefit from the application of the reduce the obstacles in the way of than 18 months), the related formalities, substitute tax are the following: foreign investors financing Italian entities. as well as the execution, modification (a) the loan must be granted by an Italian With particular reference to the real and redemption of such loans, and any bank (or by an entity carrying on estate sector, where most investments related guarantee or security, subrogation, bank activity pursuant to Italian law), are financed through mortgage loans, the replacement, postponement, splitting or by the Italian branch of a European reservation of the substitute tax benefit cancellation, including the assignment bank, or by a European bank which to banks had the effect of reducing access of receivables related to such loans, does not have a branch in Italy; to credit. Since August 2014, when the may in certain cases be exempted from (b) the original maturity date of the loan Competitiveness Decree came into force, registration tax, stamp duty, mortgage and agreement must be later than 18 foreign investors financed by insurance cadastral taxes and governmental tax. months after the signing date; and companies have also benefitted from a Under Presidential Decree No. 601 (c) the relevant loan agreement must be substantial reduction of the tax burden in of 29 September 1973, article 15 ff, it signed in Italy or executed therein. the case of financing with security packages.
ISSUE 19 • 2015 | 41 general real estate | portugal PORTUGAL’S POSITION IN THE EUROPEAN INVESTMENT MARKET LUÍS FILIPE CARVALHO AND MARIANA D’ALMEIDA RIBEIRO, ABBC LAW FIRM, LISBON
hy invest in Portugal? Portugal is currently developing a very solidW investment strategy by granting residency authorization visas (known as golden visas) with the aim of attracting foreign investment. (For details of the golden visa regime, see Luís Filipe Carvalho and Maria Barão Assis, “Obtaining a ‘Golden Visa’ through Real Estate Acquisition” Real Estate Gazette (Issue 12, 2013) page 28; for more on real estate investment trends in Portugal generally, see Luís Filipe Carvalho and Maria Barão Assis, “Real Estate Investment Trends in Portugal” Real Estate Gazette (Issue 16, 2014) page 32 (hard copy) and page 56 (soft copy).) The latest statistical data published by the Portuguese government reveals that a total of 1,936 golden visas were granted over a period of two years, with over EUR 1 billion being invested by estate market can offer solid returns. transactions, other commercial foreign investors holding a golden visa. From a domestic perspective, this transactions for capital assets that have It is important to note that 91 per sector has assumed an important role been in the offing for the past few cent of the total foreign investment in reaffirming Portugal’s position as an years look set to be completed in 2015, referred to above has been in the real attractive market in which to invest, boosting profits in this sector even further. estate sector, and represents over EUR compared to its European neighbours. It In the commercial rental market, as a 60 million in taxes and EUR 20 million is also worth noting that, given the cyclical general rule, rents have remained stable and from the issue of visas. In just one month nature of investment, Portugal’s eventual vacancy rates have decreased substantially. (November 2014), 132 new investors success in its current fight against were registered and EUR 90 million unemployment should, in the long run, Portugal versus Europe poured into the real estate sector. stimulate increased demand in real estate. There are various factors that make Portugal benefits from an attractive Portugal attractive to foreign investors. environment, a pleasant climate and Commercial real estate A country’s cost of living, its climate, a transparent tax regime, particularly Commercial real estate has also been the quality of its health care and the advantageous to those wishing to retire performing well, registering growth of strength of its hospitality industry are to the country. All these factors tend 130 per cent in comparison to 2013. to suggest that Portugal offers highly Investment in this area has doubled, key factors when it comes to investment, attractive investment opportunities. and this is due in part to an increase and in all these areas, Portugal has much Notwithstanding the economic crisis in foreign investment greater than that to offer. The country has been named that continues to blight much of Europe, registered in previous years. as one of the ten best countries in the investor confidence remains high and it Market commentators are forecasting world in which to spend your retirement. may be justifiably asserted that no other that investment in commercial real estate In addition, real estate in Portugal is investment strategy has achieved the in 2015 will continue to grow, possibly generally of high quality and offers positive results seen in Portugal’s real at a record rate, partly due to sales at investors good value for money. estate sector. Further, success breeds levels not seen in 2014, such as the sale For all these reasons, it would be fair success and Portugal’s past performance and purchase of real estate valued at over to say that Portugal holds an exceptional in this sector means that investors are EUR 200 million. position in the European real estate now highly confident that Portugal’s real In addition to these high value investment market.
42 | real estate gazette general real estate | russiA RUSSIA CONTINUES TO LEGISLATE FOR THE ALLOCATION OF STATE- OWNED LAND FOR CONSTRUCTION DIANA PRONYUSHKINA, MOSCOW
o date, a large proportion New public land allocation when the prior approval of the property of land in Russia owned by procedure location procedure may be applied. the state (that is, public land) Current land legislation provides for two Such uncertainty may lead to the remains undeveloped and different procedures for allocating public disastrous situation of immovable theT state authorities are interested in land to interested parties depending property, which has been constructed bringing in private investors to develop on the purposes of the land use: (i) for in compliance with established it. To this end, a real effort is being made construction; or (ii) for purposes which requirements on a plot of public land to improve land and town planning are not connected with construction. allocated in accordance with the prior legislation to make the construction Public land may be allocated for approval of the property location process easier for private developers. construction purposes through: (i) a procedure, being deemed to be illegal Important recent amendments to the tender; or (ii) “the prior approval of the and subject to a demolition order. law in this area have been made with the property location” procedure. Under the new regulations, public land aim, among other things, of simplifying The current regulation of the should be allocated through a tender in the public land allocation procedure public land allocation procedure the form of a public auction regardless for commercial construction purposes. for construction purposes is rather of its intended use (for construction or These changes take effect from 1 March ambiguous and may be interpreted in other purposes). In addition, public land 2015, and this article examines the different ways. In addition, it is not entirely designated for commercial construction amendments and their impact. clear when a tender is required and may be allocated to interested parties
ISSUE 19 • 2015 | 43 general real estate | russia
“The amendments should make the public land allocation procedure simpler, more efficient and clearer. on a lease basis only and it cannot be An additional advantage claimed for Such development generally includes:” privatized until after construction is the new procedure is the reduction of (i) preparation of the development completed. allocation terms to between two and concept (for example, construction of an There are some exceptional cases, three months in comparison to the industrial site with production facilities, three-year term employed under the strictly limited by law, when public land residential buildings for its employees, may be allocated for a construction lease current procedure. etc); (ii) development of town planning without a tender. Such exceptions, among other things, include the following cases Use of public land without a documentation; (iii) formation of separate when rights to plots of public land are lease land plots, and (iv) construction of granted: Another important amendment is that, immovable properties on the newly • on the basis of a decree of the Russian from 1 March 2015, public land may formed land plots together with the president; be used for certain purposes without infrastructure facilities necessary for their the need to obtain a lease or easement • on the basis of a decree of the operation (roads, driveways, utilities, right. This use will be allowed subject Russian Government regarding the etc.). As a result, after construction is to a permit from the competent state/ placement of property for social complete, the developed land should be municipal authority and only if the or cultural needs, or regarding intended use of the plot of land is one of fully provided with all facilities necessary the implementation of major the following: for its operation; this is in contrast to investment projects which meet high-rise development when a separate criteria established by the Russian • conducting engineering surveys or building is constructed near other Government in a separate Act (to exploration; date, no Act has yet been adopted); • carrying out capital or current facilities on already developed land. • in order to fulfil the international repair of infrastructure (for example, Under the current land legislation, obligations of the Russian Federation, pipelines, high voltage electricity lines, complex development is only applicable etc. etc.) or the reconstruction of federal, to the implementation of residential regional or local infrastructure; The law does not stipulate a specific development projects. From 1 March term for lease agreements affecting • constructing temporary or support 2015 the construction of manufacturing public land. Under the new amendments, facilities or storing construction sites or logistics parks or indeed any different terms may apply, depending on materials or construction equipment; other property will also be possible the type of property to be constructed. • placing temporary retail facilities and under the complex development For example, in the case of the advertising structures, etc. procedure. development of buildings or facilities, the lease term may vary from three to Complex development of Potential impact of the ten years, while leases on land where public land amendments infrastructure is being constructed may The amendments also affect existing The adoption of the amendments last for a term of up to 49 years. regulation of land marked out for In addition, if the construction process complex development, with the aim described above is aimed, first and is not completed within the term of the of creating an integrated approach to foremost, at making the public land lease agreement, the courts may order construction on public land. In general, allocation procedure simpler, more the unfinished construction project to the concept of complex development efficient and clearer for all those involved cease and that the land be sold by public covers a set of actions performed by in the development of land. However, the tender. a private developer with the support amendments do not contain regulations Another important change is that every of local authorities aimed at reclaiming affecting or clarifications on all issues a large amount of undeveloped public interested party is entitled to initiate an connected with the new procedure, auction in relation to the specific plot of land (see Oksana Derevyanko, “Issues and it may be anticipated that the land. This is a step towards establishing Relating to Complex Development the developers’ right to choose plots of Projects Under Russian Law” Real Estate implementation of the procedure will land for construction on an independent Gazette (Issue 18, 2014) page 33 (hard face a number of practical problems basis without relying on the local copy) or page 58 (soft copy) for more on which will have to be resolved, in order authorities’ discretion. complex development projects in Russia). for it to work.
44 | real estate gazette general real estate | sweden AVOIDING STAMP DUTY BY MEANS OF CADASTRAL MEASURES GUSTAF STRÖM AND JOHAN FORSLING, DLA NORDIC, STOCKHOLM
ost real estate transactions The reason for real estate transactions partitioning. It will come as no surprise in Sweden are made being performed by means of cadastral to learn that the legislator did not create as direct transfers or procedures of greater or lesser these cadastral procedures in order to through special purpose complexity is, of course, tax-driven. In facilitate the avoidance of stamp duty! Mvehicles. For some time now, the number Sweden, every direct transfer of real On the contrary, reallotment is a method of transactions carried out by means of estate is subject to stamp duty. At the envisaged (and most commonly used) cadastral procedures have increased and rate of 4.25 per cent of the purchase to create one plot of land out of two in recent years, Sweden has experienced price or taxed value (whichever is or more previously separate plots of a further increase, in particular with regard higher) and 1.5 per cent for individuals, land, and partitioning is merely a way of to partitioning. The trend is apparent in the the amount of stamp duty levied can be dissolving joint ownership of real estate. greater Stockholm area and the Öresund significant for attractive real estate. This article examines the two cadastral region, whilst the method is not at all There are two main cadastral procedures and gives a brief overview of common in other parts of Sweden, mainly procedures used for commercial how a transaction by means of cadastral because of lower property values there. property transactions: reallotment and procedure may be structured.
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Reallotment uncertainty in such a transaction than partitioning, end up with a much larger The obvious situation in which reallotment is normally the case in a direct transfer. portion of land as a new property. could be carried out is where you have Therefore, it is recommended that the The complexity of cadastral procedures two parcels of real estate which would be purchase agreement includes alternative in Sweden means that a structured more suitable as one unit. The two parcels methods of securing the sale, should the transaction by means of partitioning must be located next to each other. The reallotment procedure fail. Specialist legal will require a considerable number of Swedish Cadastral Authority may, upon advice is essential. agreements, in particular with regard application, transfer the site of the first Partitioning to joint ownership, which may last for parcel into the second, thus creating one, between six and twelve months. Careful larger parcel. The main requirement is Partitioning of real estate is mainly used as a means to dissolve joint ownership, consideration should be given before that a land surveyor approves this transfer. often between relatives who have entering into joint ownership of property Although the land owner giving up land inherited the property, thus creating joint for various reasons. For instance, the is often compensated in the same way ownership. As noted earlier, partitioning potential for qualifying for a mortgage as would have been the case in a direct has also become an instrument in is limited during the period of the joint transfer, no stamp duty is levied on the commercial transactions, solely because ownership and for a short period of reallotment. The cost of a cadastral the partitioning of land is exempt from time thereafter. However, if time is not procedure varies depending on its stamp duty, whilst the more common a concern and the relationship with the complexity, but if, for example, the Swedish method—sub-division—is not. other potential joint owners is stable, Cadastral Authority charges approximately there may be significant tax savings. As EUR 10,000 for the cadastral procedure, Partitioning of real estate should be usual, specialist legal advice should be the value of the land in question and the considered when the asset involved in the transaction is a part of a larger sought before initiating a partitioning compensation paid for it must exceed property. Separation of the desired transaction, as the Cadastral Authority around EUR 235,000 in order for the part of the property is most commonly is not likely to be helpful where the real transaction to benefit from a reallotment achieved by means of sub-division, where structure. Clearly then, most commercial objective of the partitioning procedure is an area of the property is separated transactions do benefit from a reallotment, tax avoidance. from the residual property unit, and should this be possible. forms a new property. Sub-division is, Closing remarks There are several ways of structuring a however, subject to stamp duty. In order Although the potential for using cadastral reallotment transfer. The most beneficial, to partition the real estate instead, the procedures such as reallotment or and also most common, is if there can be purchaser must first enter into joint partitioning as a method of avoiding found (or created through sub-division) ownership of the property in question. stamp duty has been apparent for a small and inexpensive parcel of real This is accomplished by purchasing a decades, the number of such transactions estate located next to the desired parcel. (non-defined) share of the property, has been relatively low and the tax In these circumstances, the smaller parcel preferably as small as possible as this would be purchased by means of a direct loss for the state negligible. However, purchase will be subject to stamp duty. the recent rise in the number of these transfer, and the bigger parcel transferred Once joint ownership has been achieved, into the smaller, by means of reallotment. transactions has prompted the Swedish the Swedish Cadastral Authority may, government to announce measures As many transactions today involve the upon application from the owners of to investigate whether there is a need purchase of large portfolios of real estate, the different shares of the property to crack down on transactions whose it is always important to check whether (based on an agreement between sole purpose is to avoid stamp duty. the requirements for a reallotment could them), use a partitioning procedure to It will not be an easy task to find the be met. divide the property into several new It should be stressed that there are properties. Swedish law stipulates that right legislative tools to clamp down on factors other than stamp duty to the partitioning should be conducted intended transactions without adversely consider before initiating a reallotment taking into account each owner’s share affecting other cadastral procedures. It procedure. Risks relating to mortgage of the property and that compensation is predicted that we will continue to eligibility are significant (although there should be paid, should one party not see transactions taking place by means may be ways around that issue) and receive a new property corresponding to of cadastral procedures and that the the procedure is often time consuming. its previous share of the whole property. inherent complexity of the process will An international investor is likely to be However, these rules may be set aside keep their numbers low enough for the unfamiliar with the Swedish cadastral if the parties agree, which means that a legislator to deem the consequent tax legislation and bureaucracy and there party may purchase as little as 1 per cent loss to the state, if not negligible, then at will always be a greater degree of of the property, and then, by means of least acceptable.
46 | real estate gazette general real estate | turkey
NEW LAW REGULATING RETAIL BUSINESSES TUNAY YILMAZLAR, ISTANBUL
ollowing 10 years’ heated “PERBIS”) under the Ministry of Customs municipalities will also take advice from debate on the subject, Law and Trade. Parties wishing to open a third parties as to whether a construction No. 6585 on the Regulation of retail business are required to apply for permit for a shopping mall should be Retail Businesses (“the Law”) an operating permit and if successful, will granted. The details of this process, and finallyF came into force on 29 January 2015. be granted a permit by the relevant local how it will operate alongside the online The details of the Law remain sketchy at authority through PERBIS. The documents procedure on PERBIS, will be detailed present but the Ministry of Customs and required and the procedure to be followed further in the forthcoming Regulation. Trade has announced that it will shortly to make a successful application are to be be issuing a Regulation to provide more set out in a forthcoming Regulation. Common areas of shopping detail. In the meantime, this article outlines malls and assignment of the provisions of the Law, and assesses its Construction permits for space at larger stores impact on the retail sector. shopping malls Two new principles introduced by the Before the Law came into force, the various Law relate to common area usage and What is the purpose of the district authorities were mainly responsible assignment of space in a shopping mall, Law? for the issuance of construction permits, factors which affect both the shopping Article 1 of the Law states that its aims under Zoning Law No. 3194. mall investors and the retailers. are: to facilitate the growth of new and However, Article 5/7 of the Law Common area usage existing retail operations; to ensure expressly provides that it is the Article 11 of the Law provides that at that retail businesses are operating in metropolitan authorities that are the least 0.5 per cent of the sales area of accordance with competition rules; “relevant authority” for the issue of a shopping mall must be allocated for to regulate the expansion of retail construction permits for shopping malls, if social and cultural activities. The same operations; and also to govern the the particular shopping mall is within the article also requires shopping malls to relations between retail operators, borders of a metropolitan authority, such provide common areas for facilities such manufacturers and suppliers. as Istanbul, Ankara, Izmir, etc. as emergency medical service units, a The Law introduces an online retail As part of this new construction permit prayer room, and a child care facility information system (known in Turkey as application procedure, the metropolitan and playground. More details on these
ISSUE 19 • 2015 | 47 general real estate | turkey
requirements are to be provided by the authorities will be required; forthcoming Regulation. • Common areas defined under Article Assignment of space 11 of the Law must be put in place in Article 12/1 of the Law stipulates that existing shopping malls by 29 January at least 5 per cent of the sales area of 2016; a shopping mall is to be allocated to • Where existing shopping malls have traders and artisans working within the vacant spaces, these must be leased by mall. This space must be leased on the giving priority to traders and artisans, basis of market value. In the event that until the ratio of 5 per cent stipulated vacant spaces are not filled by traders by Article 12/1 is reached; and artisans within 20 days as of their becoming available, those spaces can then • Similarly, vacant spaces within existing be leased to other parties. shopping malls must be leased Moreover, Article 12/2 of the Law states to persons who are practising a that at least 0.3 per cent of the sales area profession with traditional, cultural or of a shopping mall is to be allocated to artistic value and which is in serious persons who are practising a profession decline, until the ratio of 0.3 per which has traditional, cultural or artistic cent stipulated under Article 12/2 is value, and which is in serious decline. reached; and The rent charged for leasing these areas • The requirements for shelf space for cannot be more than 25 per cent of their local products within large and chain market value. stores prescribed under Article 12/3 In terms of the shelf assignment at the must be met by 29 January 2016. large and chain stores, Article 12/3 of the It should be noted that the Law also Law requires that shelves corresponding to at least 1 per cent of the sales area provides sanctions for existing or new of a big store or a chain store must be shopping malls and retailers that do not assigned to local products. Again, more comply with these provisions within the details of this provision will be given in prescribed periods. the Regulation. Lastly, the Law introduces new provisions on payments to be made to “ Existing shopping malls and suppliers and others, details of which will At least 5 per cent retailers be given in the Regulation. Under Provisional Article 1, the Law aims of the sales area of to protect the rights of existing shopping Conclusion a shopping mall is malls and retailers and it introduces the It can be argued that although the draft following requirements: Law provided more protection for to be allocated to • Information relating to existing retail traders and artisans, the final version of operators will be transferred to the Law, in fact, provides for protection traders and artisans PERBIS within one year of PERBIS for all parties. As noted at the outset of working within the being up and running; this article, many uncertainties remain • Permits which have already been under the Law, and it is hoped that the mall. issued to retailers by the relevant forthcoming Regulation from the Ministry district will still be valid and no further of Customs and Trade will provide more ” application to the metropolitan detail on the provisions outlined above. 48 | real estate gazette general real estate | uk RIGHTS TO LIGHT—A NEW DAWN APPROACHING? BEN BARRISON, LONDON
ntroduction be altered significantly. In an effort to address the problems, Rights to light issues can have Over the past 200 years, various England’s Law Commission undertook a significant impact on any statutes and cases have sought to clarify a detailed review of the law on rights to development scheme in England. how and when rights to light can arise or light. The Law Commission’s final report INeighbours can obtain court orders, be extinguished and/or what should be was published in December 2014 and known as injunctions, to prevent the appropriate remedy for interference proposed significant changes to rights interferences with their rights to light with the rights—injunction or damages? If to light law, which are expected to and/or be awarded significant damages damages, how should they be calculated? to compensate them for the loss Despite these efforts, the issue of rights be adopted by Parliament. This article of their rights. In some cases, these to light remains an uncertain and usually considers the current problems posed claims can destroy the viability of a highly contentious area of risk for most by rights to light claims and the solutions development scheme or require it to development schemes. proposed by the Law Commission.
What is a right to light? What is an easement? An easement to enjoy the natural light that passes over someone A right benefiting a piece of land that is enjoyed over else’s land, and then enters a building through apertures/openings another piece of land owned by someone else. such as windows (with or without glass), skylights and glass roofs. What is not covered by a right to light? How much light? • A right to a view Sufficient natural light to allow the room or space behind • A right to sunlight the relevant aperture/opening to be used for its ordinary • A right not to be overlooked purpose. The amount of light can depend on type of • A right to privacy property and room. However, many of the above are public law considerations for the grant of planning permission.
How can rights to light arise?
Immediately: Enjoyment over time: • Express grant • Prescription Act 1832—20 years’ enjoyment “as of right” • Implied grant • Common law prescription • Statute • Doctrine of lost modern grant
Uncertainty, imbalance and has been erected and has then obtained an Furthermore, recent Supreme Court more uncertainty injunction requiring it to be cut back. These discussion of the point suggests a flexible, Developers must tread very carefully were extreme cases that show quite how proportionate approach that regards as to how and when they deal with the much trouble an injunction can cause at any injunction as a last rather than first potential impact of rights to light claims stage in a development project. resort is to be favoured. However, the on their scheme. The injunctions that can Given the nature of the threat posed judge in each case retains a high degree be awarded can result in the developer by an injunction, neighbours can often of autonomy as to how to exercise having to cut back their proposed scheme extract favourable settlement payments discretion in that particular case. Therefore, and/or stop work altogether. Thus the from developers who may be prepared until judgment is delivered, a developer financial implications can be huge. to pay to settle a claim rather than may still face the risk that the court will A neighbour who may be entitled to run the risks associated with court order that its scheme be stopped. an injunction is under no constraints as proceedings. With claims of this nature, Notwithstanding the problems for to when it must issue proceedings for the risks arising from court proceedings developers, neighbours seeking such an injunction except that the courts will include the usual factors such as time and injunctions should not do so lightly. generally not assist a party who seeks expense but also an additional layer of Litigation relating to these injunctions can an injunction after the event, if it can be risk arising from the courts’ discretion as be very expensive and time consuming. shown that they had the opportunity to to whether or not to award the claimant Where a party seeks an interim act sooner. Notwithstanding this general damages or an injunction. The case law injunction requiring the development principle, there are examples in case law provides some guidance for judges as to to stop while the case is determined, where a party has waited until a building how this discretion should be exercised. the party requesting the injunction will
ISSUE 19 • 2015 | 49 have to give the court an undertaking negotiations and light obstruction notices (NPO) procedure by which a developer to pay for any losses suffered by the can take time that is sometimes not can put its neighbours on notice as to developer, if the court goes on to decide available to a developer, many parties the proposed development. Following that an injunction is not the appropriate now regard rights to light insurance as a service of the notice, the neighbour remedy. In the context of a development, viable alternative to negotiated solutions must issue injunction proceedings the losses could be significant, so the and light obstruction notices. within eight months otherwise it will neighbour may be required to provide Developer-led litigation can be only be entitled to claim damages for security for its undertaking either by appropriate in circumstances where the any interference with its rights to light. way of payment of a sum into court or neighbour’s claim lacks merit but the party Since the proportionality test is very similar a charge over its assets. Accordingly, the is still seeking to extract damages using to the approach commended by the threat of an injunction should always be the threat of injunction. It is an option that Supreme Court in Coventry v Lawrence, it considered in the context of whether the should be deployed very carefully. seems highly likely that the courts may be process can be funded. The Law Commission’s inclined to adopt a similar test in upcoming cases even if the adoption of the test is Current options for proposals presented as part of the courts’ general developers There are two significant changes to consideration as to how to exercise their Developers often deploy one or more of the law being proposed by the Law remedial discretion. This may mean the the following tactics as part of their rights Commission: courts are less likely to award injunctions to light strategy: 1. A statutory test of proportionality for the courts to use when deciding whether in the future but developers should remain • Negotiations to achieve early settlement injunction or damages is the appropriate vigilant as there are a number of criteria and the release of future claims; for the courts to apply and the existence remedy. The recommendation is that of artificial light and planning consent are • Light obstruction notices; a court must not grant an injunction • Rights to light insurance; and/or to restrain the infringement of a unlikely to tip the balance in favour of damages in every case. • Developer-led litigation to determine right to light if doing so would be a Once adopted, the proposed changes the existence of the rights to light and disproportionate means of enforcing should enable developers to manage the appropriate remedy. the dominant owner’s right to light taking into account all of the rights to light risks with greater certainty. A negotiated solution will provide circumstances, including: Some industry commentators have certainty for the developer at an early • the claimant’s property (for suggested that the NPO procedure stage. It may in some cases involve paying should be regarded as a last resort in more than the claim is “worth” but it example, whether it is residential or commercial); the event that negotiations fail as it can does eliminate the risk. appear to be aggressive. However, it • the loss of amenity attributable to Light obstruction notices are statutory seems to this author that, if and when the infringement including the extent notices that can be served to prevent a available, the NPO may in fact be a neighbour claiming rights to light based to which artificial light is used at the property; sensible step for developers to take on 20 years’ continuous enjoyment as of at an early stage so they can establish right. If these remain unchallenged for 12 • whether damages would be which neighbours are in fact going to months, the neighbour’s claim based on adequate compensation; seek injunctions and which will settle for 20 years’ enjoyment is eliminated. As well • the claimant’s conduct; financial compensation. as eliminating claims, these notices can • whether the claimant delayed be a useful way to “flush out” potential unreasonably in claiming an Conclusion claimants. However, they can have injunction; While we await the introduction of the unintended consequences as they may • the defendant’s conduct; recommendations, parties must continue alert parties to their potential rights. to deal with rights to light matters under • the impact of an injunction on the In the past few years, rights to light the current regime and take care to defendant; and insurance has become more and more engage a proper and effective rights to popular. As with all insurance, it does not • whether the scheme is in the public light strategy. Different schemes require prevent the problem arising but provides interest. different strategies. The key is to be comfort in the event that it does. Since 2. A Notice of Proposed Obstruction vigilant, aware and flexible.
50 | real estate gazette DLA Piper Offices
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